Question

13. Comfort Cloud 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 current production: Sales price per unit $430 Variable costs per unit: Manufacturing Marketing and administrative S80 Total fixed costs: Manufacturing Marketing and administrative $760,000 $220,000 If a special sales order is accepted for 2700 seats at a price of $350 per unit, fixed costs increase by $6600, and variable marketing and administrative costs for that order are $1 per unit, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order) A) Increase by $290,400 B) Decrease by $287,700 C) Increase by $294,300 D) Increase by $287,700

Answer 1

Change in operating income = Incremental revenues – Incremental costs

Since there is spare capacity, existing fixed costs are not relevant for the special order

= (350-240-1)*2,700 – 6600

= $287,700

i.e increase by $287,700

i.e. D