Question

The manufacturing capacity of Susil Company's facitilites is 30,000 untis of product a year. A summary or operating results for the year ended December 31, 2012 is as follows: Sales (18,000 units @ $100) $1,800,000 Variable manufacturing & selling costs ($55 per unit) 990,000 Contribution Margin $ 810,000 Fixed costs 495,000 Operating Income $ 315,000 A foreign distributor has offered to buy 15,000 units at $90 per unit during 2013. Assume that all of Susil's costs would be at the same levels and rates in 2013 as in 2012. If Susil accepts this offer, it will have to reject some regular business from regular customers so as not to exceed capacity. If they acccept the special order, how much will operating income change?

Answer 1

Answer:

Operating Income will increase for 225,000

Explanation:

The company will sale 15,000 units at 90

The unit cost is 55

The capacity is 30,000

This order is for 15,000

Leaving 15,000 for regular local business

currently the local sales are 18,000

So it will decrease by 3,000

Putting those numbers together we arrive to the conclusion:

$\left[\begin{array}{cccc}& Units& Cost& Total\\ Special Order&15,000&90&1,350,000\\ Variable Cost&15,000&-55&-825,000\\ rejected local&-3,000&100&-300,000\\ Net Income&&&225,000\\\end{array}\right]$

Even with the decrease in local business sales, it is better to accept the foreing distributor offer.