Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but currently produces and sells 75,000 seats per year. The following information relates to current production of seats:
Sale price per unit $420
Variable costs per unit: Manufacturing $260 Marketing and administrative $40
Total fixed costs: Manufacturing $770,000 Marketing and administrative $200,000
If a special sales order is accepted for 4000 seats at a price of $375 per unit, fixed costs remain unchanged, and no variable marketing and administrative costs will be incurred for this order, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.) Group of answer choices
Decrease by $460,000
Increase by $2,540,000
Increase by $460,000
Increase by $300,000
To determine how the special sales order will affect operating income, we need to calculate the incremental revenue and incremental costs associated with the order.
The special order is for 4,000 seats at a price of $375 per unit. [ \text{Incremental Revenue} = 4,000 \text{ seats} \times $375/\text{seat} = $1,500,000 ]
Since no variable marketing and administrative costs will be incurred for this order, we only consider the variable manufacturing costs.
Variable manufacturing cost per unit is $260. [ \text{Incremental Variable Costs} = 4,000 \text{ seats} \times $260/\text{seat} = $1,040,000 ]
[ \text{Incremental Contribution Margin} = \text{Incremental Revenue} - \text{Incremental Variable Costs} ] [ \text{Incremental Contribution Margin} = $1,500,000 - $1,040,000 = $460,000 ]
Fixed costs remain unchanged, so they do not affect the incremental analysis.
The operating income will increase by the incremental contribution margin. [ \text{Increase in Operating Income} = $460,000 ]
Therefore, the correct answer is: [ \text{Increase by } $460,000 ]