Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently produces and sells 75,000 seats per year. The following information relates to current production of seats: If a special sales order is accepted for 3,100 seats at a price of $330 per unit, and fixed costs increase by $15,000, how would operating income be affected? A. Increase by $109,000 B. Decrease by $109.000 C. Increase by $124,000 D. Increase by $233,000

                                              $

Sale price                            400

Variable cost

Manufacturing                        250

Marketing and administrative40

Total Fixed cost :

Manufacturing                         790,000

Marketing and administrative200,000

Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently produces and sells 75,000 seats per year. The following information relates to current production of seats: If a special sales order is accepted for 3,100 seats at a price of $330 per unit, and fixed costs increase by $15,000, how would operating income be affected? A. Increase by $109,000 B. Decrease by $109.000 C. Increase by $124,000 D. Increase by $233,000

Answer :

     a) Increase by  $109,000

Explanation:

The relevant cost for decision to accept the special order are

I. the incremental contribution from of producing 3,100 units

2. The incremental fixed cost- 15,000

Note that whether or not the special order is accepted the manufacturing and Marketing and administrative fixed cost of   790,000 200,000 would be incurred either way.

Contribution per unit =Selling price - Variable cost

                                  = $330 - (250+40) = $40

Incremental contribution = $40 × 3,100 =  $124,000

Operating income would increase by = $124,000 -$ 15,000

                                                           = $109,000

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