Lowwater Sailmakers manufactures sails for sailboats and sells them to regular c
ID: 2567067 • Letter: L
Question
Lowwater Sailmakers manufactures sails for sailboats and sells them to regular customers at S140/unit. The company has the capacity to produce 25,000 sails per year, but is currently producing and selling 20,000 sails per year. The following information relates to current production Sale price per unit $150 Variable costs per unit: Manufacturing Marketing and administrative S55 S25 Total fixed costs: Manufacturing Marketing and administrative S640,000 $280,000 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 S125 per unit, how would operating income be affected? (NOTE: No Idle Capacity) A. Decrease by $75,000 B. Increase by $190,000 C. Decrease by $125,000 D. Increase by $225,000Explanation / Answer
Note for understanding : When the entity operates at less than its maximum capacity & have enough capacity left to accomodate the special order than the special order must be accepted if the additional sales exceed the additional variable cost. ie Sales - variable cost > 0
But when the entity operates at its full capacity than cost of special order shall also include the lost contribution from sacrificing the regular sales thus in this case special order must be accepted if
Sales - variable cost - contribution lost > 0.
However, regular fixed cost are never consider to determine the profitability of special order.
Answer 21
Impact of special order on operating profit (idle Capacity)
Sales value from special order = 5,000 units * $125 = $625,000
Variable cost from special order = 5, 000 units * ($55 +$25 ) = $400,000
Increase in operating profit = $625,000 - $400,000 = $225,000
Final Answer : D. Increase by $225,000
Answer 22
Impact of special order on operating profit (No Idle Capacity)
Lost contribution for sacrificing regular sales = ($150 - $55- $25) *5,000 units = $350,000
Sales value from special order = 5,000 units * $125 = $625,000
Variable cost from special order = 5, 000 units * ($55 +$25 ) = $400,000
Decrease in operating Income = $625,000 - $400,000 - $350,000 = $125,000
Final Answer . C. Decrease by $125,000
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