Question

The following information relates to current production of outdoor chaise lounges Backyard Posh:

Variable manufacturing costs per unit	$104
Total fixed manufacturing costs	$525,000
Variable marketing and administrative costs per unit	$31
Total fixed marketing and administrative costs	$270,000

The regular selling price per chaise lounge is $340. The company is analyzing the opportunity to accept a special sales order for 300 chaise lounges at a price of $220 per unit. Fixed costs would increase by $22,000. The company has the capacity to produce 35,000 chaise lounges per year, but is currently producing and selling 13,000 chaise lounges per year. Regular sales will not be affected by the special order. If the company were to accept this special order, how would operating income be affected?

		Decrease by $3500
		Decrease by $25,500
		Increase by $3500
		Increase by $25,500

Answer 1

	Special Order
Sales form special lounges(300*$220)	$66,000
Less:Variable manufacturing cost(300*$104)	$31,200
Less:Variable marketing and admin cost(300*$31)	$9,300
Contribution margin	$25,500
Less:Increase in Fixed costs	$22,000
Net Increase in Profit	$3,500
So Option C is answer