Question

The following information relates to current production of bench seats for boats at Aquamarine Manufacturing:

Variable manufacturing costs per unit $ 102.00
Total fixed manufacturing costs $ 525,000
Variable marketing and administrative costs per unit $ 30.00
Total fixed marketing and administrative costs $ 250,000
The regular selling price per bench seat is $200.00. The company is analyzing the opportunity to accept a special sales order for 3,000 bench seats at a price of $140.00 per unit. Variable marketing and administrative costs would be $15 per unit lower than on regular sales. Fixed costs would increase by $10,000. The company has the capacity to produce 15,000 bench seats per year, but is currently producing and selling 10,000 bench seats 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?

Answer 1

The operating income would be affected with a los off $716,000 besides the $95,000 that the company losses operating with the regular order.

Step-by-step explanation:

Ok with the information provided lets set up the equations (we are going to separate the equations by regular order and especial order):

Regular order:

CT = 775,000 + 132X (Total cost)

TR= 200X (Total Revenue)

OI = 68X - 775,000 (Operating Income)

Especial order:

CT = 785,000 + 117X (Total cost)

TR = 140X (Total Revenue)

OI = 23X - 785,000 (Operating Income)

Now lets see how the operating income is with the production and selling of 10,000 bench seats:

OI = 68(10,000) - 775,000 = -95,000

This company operates at a loss of $95,000, now lets see how would operating income be affected by the especial order of 3,000 bench seats:

OI = 23(3,000) - 785,000 = -716,000

Another loss, so the operating income would be affected with a los off $716,000 besides the $95,000 that the company losses operating with the regular order.