San Francisco Seats manufactures seats for airplanes. The company has the capaci

Question

San Francisco Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production:

Sale price per unit = $400

Variable costs per unit:

Manufacturing = $220

Marketing and administrative = $50

Total fixed costs:

Manufacturing= $750,000

Marketing and administrative =$200,000

If a special sales order is accepted for 4,000 seats at a price of $325 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)

Explanation / Answer

Increase in Operating Income by Accepting Special Order = 4,000 seats x ($325 - $220)

..............................................................................................= $420,000

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