If a special sales order is accepted for 4,000 seats at a price of $375 per unit, fixed costs remain unchanged, and no variable marketing and administrative costs will be incurred for this order, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

Question

Business

Tucker

23 June, 10:58

If a special sales order is accepted for 4,000 seats at a price of $375 per unit, fixed costs remain unchanged, and no variable marketing and administrative costs will be incurred for this order, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

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Orlando Davidson · Answer 1

Increase in operating income.

Explanation:

If a special sales order is accepted where fixed costs remain unchanged and no variable marketing and administrative costs are incurred, there will be an increase in the operating income of the company, assuming that there is no adverse effect to the regular sales.

In recording the transaction, what will be presented are the special order price and the variable manufacturing costs. This results to manufacturing contribution margin.

Thus, whatever increase in the contribution margin will have the same increase in the operating income because of the absence of the variable selling and administrative costs.