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XYZ manufactures seats for helicopters. The company has the capacity to produce 100,000 seats per year,...

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Accounting

XYZ manufactures seats for helicopters. The company has thecapacity to produce 100,000 seats per year, but is currentlyproduces and sells 75,000 seats per year.

Selling price per unit

$ 200

Variable costs per unit:

Manufacturing

$ 110

Operating

$ 25

Fixed costs:

Manufacturing

$ 375,000

Operating

$ 100,000

If a special sales order is accepted for 2,500 seats at a priceof $ 160 per unit, fixed costs increase by $ 2,500, and variablemarketing and administrative costs for that order are $12.50 perunit, how would operating income be affected?

I got answer of  -($ 91,250)Please show the solution

Answer & Explanation Solved by verified expert
4.0 Ratings (642 Votes)

1. If 75,000 seats are produced and sold;
$ $
Selling price per unit                  200
Less: Variable cost per unit;
Manufacturing                    110
Operating                      25
Total variable cost per unit                (135)
Contribution Margin per unit                    65
Total Contribution Margin for 75,000 seats       4,875,000
Less: Fixed costs;
Manufacturing            375,000
Operating            100,000
Total fixed costs         (475,000)
Net income       4,400,000
2. If special order is accepted;
$ $
Selling price per unit             160.00
Less: Variable cost per unit;
Manufacturing              110.00
Operating                25.00
Variable marketing and administrative costs                12.50
Total variable cost per unit           (147.50)
Contribution Margin per unit               12.50
Total Contribution Margin for 2,500 seats       31,250.00
Less: Additional fixed costs        (2,500.00)
Net income from special order       28,750.00
Conclusion: If special order is accepted, total net income of XYZ will increase by $ 28,750.

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