Problem 5 (10 points): Briny Sail Makers manufactures sails for sailboats. The c

Question

Problem 5 (10 points): Briny Sail Makers manufactures sails for sailboats. The company has the capacity to produce 50,000 sails per year and is currently producing and selling 30,000 sail per year. The following information relates to current production: $17 Sales price per unit Variable costs per unit $62 Manufacturing Selling and administrative $22 Total fixed costs: Manufacturing $675,000 Selling and administrative $300,000 If a special pricing order is accepted for 5,500 sails at a sales price of $160 per unit, unavoidable, what is the effect on operating income? and for the order the variable or fixed selling and administrative costs are

Explanation / Answer

Fixed Manufacturing cost, Fixed Selling and Administrative Cost and variable selling and administrative cost will not be affected by the special order and hence will not be considered in calculating effect on operating income. The effect on operating income is calculated as follows:-

Contribution Margin per unit from Special order = Sale Price - Variable Manufacturing costs

= $160 - $62 = $98 per unit

Increase in operating income = Units sold in special order*Contribution Margin per unit

= 5,500 sails*$98 per unit = $539,000

Therefore the operating income will increase by $539,000 if the special pricing order is accepted for 5,500 sails.

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