High Seas Sail Makers manufactures sails for sailboats. The company has the capa

Question

High Seas Sail Makers manufactures sails for sailboats. The company has the capacity to produce 37,000 saila per year and is currently producing and selling 25,000 sails per year. The following information relates to current production Sales price per unit Variable costs per unit: Manufacturing Selling and administrative Total fixed costs: Manufacturing Selling and administrative $185 s60 $20 $700,000 $300,000 if a special pricing order is accepted for 5,600 sails at a sales price of $16o per unit, fixed costs remain unchanged, and there are no variable selling and administrative costs for this order, what is the change in operating income? Select one A. Operating income inicreases by $560,000 B. Operating income decreases by $560,000. C. Operating income decreases by $148,000 © D. Operating income increases by 5448,000.

Explanation / Answer

Note: In case of special order , only variable cost of maufacturing ( direct + overheads) are relevant costs thus all other costs like regular fixed costs , selling & distribution cost are to be ignore(unless otherwise mention in question) for calculating profitability of special order.

Change in Operating income due to special order = ($160 - $60) * 5,600 units = $560,000 increase

Answer .A. Operating income increases by $560,000

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