1) Pacific Auto manufactures batteries for cars. The company has the capacity to
ID: 2466427 • Letter: 1
Question
1) Pacific Auto manufactures batteries for cars. The company has the capacity to produce 35,000 batteries per year, and is currently producing and selling 25,000 batteries per year. The following information relates to current production:
Sale price per unit
$175
Variable costs per unit:
Manufacturing
60
Marketing and administrative
20
Total fixed costs:
Manufacturing
$700,000
Marketing and administrative
$300,000
If a special sales order is accepted for 5,500 batteries at a price of $150 per unit, and fixed costs remain unchanged, what is the change in operating income? (Assume the special sales order will require variable manufacturing costs and variable marketing and administrative costs.)
A) Operating income decreases by $825,000.
B) Operating income increases by $825,000.
C) Operating income decreases by $385,000.
D) Operating income increases by $385,000.
Sale price per unit
$175
Variable costs per unit:
Manufacturing
60
Marketing and administrative
20
Total fixed costs:
Manufacturing
$700,000
Marketing and administrative
$300,000
Explanation / Answer
variable manufacturing costs and variable marketing and administrative costs for one unit = $60 + $20 = $80
As fixed costs will remain unchanged those are irrelevant cost for making decision for the special order.
The operating income will increase by $385000
Incremental sales revenue from 5500 batteries ($150 * 5500) $ 8,25,000.00 Less: Incremental cost ($80*5500) $ -4,40,000.00 Incremental operating income $ 3,85,000.00Related Questions
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