Question

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

Sale price per unit	$430
​	​
Variable costs per unit:	​
Manufacturing	$250
Marketing and administrative	$50
​	​
Total fixed costs:	​
Manufacturing	$770,000
Marketing and administrative	$240,000

If a special sales order is accepted for 3000 seats at a price of $330 per unit, and fixed costs increase by $13,000, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

		Increase by $90,000
		Increase by $77,000
		Decrease by $77,000
		Increase by $227,000

Answer 1

Correct answer--------Increase by $77,000

Working

financial advantage (disadvantage) of accepting the special order
Additional Revenue from offer (3000 x $330)	$      990,000.00
Less: Total Additional cost due to acceptance of offer	$      913,000.00
Financial Advantage	$        77,000.00

.

Calculation of Additional Cost of Order
	Per Unit	Total
Variable Manufacturing	$              250.00	$       750,000.00
Variable Marketing and administrative	$                50.00	$       150,000.00
Additional fixed cost		$          13,000.00
Total Additional cost due to acceptance of order	$              300.00	$       913,000.00