USE THE FOLLOWING INFORMATION FOR THE NEXT S QUESTIONS: wwater Sailmakers manufa
ID: 2567057 • Letter: U
Question
USE THE FOLLOWING INFORMATION FOR THE NEXT S QUESTIONS: wwater Sailmakers manufactures sails for sailboats and sells them to regular customers at 40/unit. The company has the capacity to produce 25,000 sails per year, but is currently ducing and selling 20,000 sails per year. The following information relates to current duction: Sale price per unit Variable costs per unit Manufacturing Marketing and administrative S55 $25 Total fixed costs Manufacturing Marketing and administrative 640,000 S280,000 21. If a special sales order is accepted for 5,000 sails at a price of $125 per unit, how would operating income be affected? (NOTE: Idle Capacity) A. B. C. D. Decrease by $75,000 Increase by $190,000 Decrease by $125,000 Increase by $225,000 22. Let us now assume that Lowwater Sailmakers is operating at full capacity. That is, Lowwater Sailmakers will be selling all 25,000 sails to regular customers this year Nevertheless, if a special sales order is accepted for 5,000 sails at a price of $125 per unit, how would operating income be affected? (NOTE: No Idle Capacity) Decrease by $75,000 B. Increase by $190,000 C. Decrease by $125,000 A. D. Increase by $225,000 6Explanation / Answer
21. Special order of 5000 units with idle capacity
Particulars
Amount (In $)
Sales Revenue from Special order
(5000units x $125 per unit)
625,000
Less: Variable Manufacturing cost
(5000units x $55 per unit)
275,000
Less: Marketing & Admin Variable Expenses
(5000units x $25 per unit)
125,000
Contribution from Special Order
225,000
There will be excess contribution of $225,000 if special order is accepted. Correct answer is D.
22. Special order of 5000 units without idle capacity
Contribution Margin per unit from regular customer
Particulars
Amount (In $)
Sales Revenue per unit
140
Less: Variable Manufacturing cost per unit
55
Less: Marketing & Admin Variable Expenses per unit
25
Contribution from Regular customers
60 per unit
Contribution Margin per unit from special order
Particulars
Amount (In $)
Sales Revenue per unit
125
Less: Variable Manufacturing cost per unit
55
Less: Marketing & Admin Variable Expenses per unit
25
Contribution from Regular customers
45 per unit
If Special order is accepted, company will have to reduce the sale to regular customers by 5000 units and as a result there will be less contribution by $15 per unit. Total Contribution lost is ($15 x 5000) = $75,000. Therefore, correct answer is A.
23. Special order of 3000 units with idle capacity.
Particulars
Amount (In $)
Sales Revenue from Special order
(3000units x $75 per unit)
225,000
Less: Variable Manufacturing cost
(3,000units x $55 per unit)
165,000
Contribution from Special Order
60,000
There will be excess contribution of $60,000 if special order is accepted. Correct answer is D.
24. Special order of 2000 units with idle capacity and increase in fixed cost
Particulars
Amount (In $)
Sales Revenue from Special order
(2,000units x $95 per unit)
190,000
Less: Variable Manufacturing cost
(2,000units x $55 per unit)
110,000
Less: Marketing & Admin Variable Expenses
(2000units x $25 per unit)
50,000
Less: Increase in fixed cost
10,000
Net Increase in income
20,000
There will be increase in income by $20,000 if special order is accepted. Correct answer is C.
Particulars
Amount (In $)
Sales Revenue from Special order
(5000units x $125 per unit)
625,000
Less: Variable Manufacturing cost
(5000units x $55 per unit)
275,000
Less: Marketing & Admin Variable Expenses
(5000units x $25 per unit)
125,000
Contribution from Special Order
225,000
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