Centric Sail Makers manufactures sails for sailboats
The company has the capacity to produce 36,000 sails per year and is currently producing and selling 30,000 sails per year. The following information relates to current production:
Sales price per unit $180
Variable costs per unit:
Manufacturing $60
Selling and administrative $20
Total fixed costs:
Manufacturing $675,000
Selling and administrative $300,000
If a special pricing order is accepted for 5,500 sails at a sales price of $160 per unit, and fixed costs remain unchanged, what is the change in operating income? (Assume the special pricing order will require variable manufacturing costs and variable selling and administrative costs.)
A) Operating income decreases by $880,000.
B) Operating income increases by $880,000.
C) Operating income decreases by $440,000.
D) Operating income increases by $440,000.
D .D)
Sales revenue (5,500 x 160 ) $880,000
Less: Variable costs
Manufacturing (5,500 x 60 ) $330,000
Selling and administrative (5,500 x 20 ) 110,000 440,000
Increase in operating income $440,000
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