Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but currently produces and sells 75,000 seats per year. The following information relates to the current production of the product: Sale price per unit: $ 440

Variable costs per unit:

Manufacturing: $ 230

Marketing and administrative: $ 50

Total fixed costs:

Manufacturing: $800,000

Marketing and administrative: $220,000

If a special sales order is accepted for 7,000 seats at a price of $340 per unit, and fixed costs remain unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A. Increase by $ 2,380,000

B. Increase by $ 420,000

C. Decrease by $ 420,000

D. Increase by $ 6,000,000

Question

Business

Brooklynn Rose

24 June, 00:38

Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but currently produces and sells 75,000 seats per year. The following information relates to the current production of the product: Sale price per unit: $ 440

Variable costs per unit:

Manufacturing: $ 230

Marketing and administrative: $ 50

Total fixed costs:

Manufacturing: $800,000

Marketing and administrative: $220,000

If a special sales order is accepted for 7,000 seats at a price of $340 per unit, and fixed costs remain unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A. Increase by $ 2,380,000

B. Increase by $ 420,000

C. Decrease by $ 420,000

D. Increase by $ 6,000,000

+2

Answers (1)

Know the Answer?

Bernard Blair · Answer 1

Increase by 420.000$

Explanation:

Company's annual revenue at this level is: 75.000*440 = 33.000.000$. Total variable expenses are 280*75000 = 21.000.000$. Total fixed expenses are 1.020.000$ making its annual profit equal to 10.980.000$. As regular sales won't be affected with the special order, and since company does not uses its entire production capacity, we can treat fixed costs as non-reimbursable costs. Therefore, we only observe relations of variable costs and income.

With price of 340$ per unit, total income is 2.380.000$ and total variable costs are 1.960.000$. The difference is 420.000$ and relates to the increase in profit in terms of non-used total production capacity.