Bridge Company makes special equipment used in cell towers

Question

Each unit sells for $410. Bridge uses just-in-time inventory procedures; it produces and sells 12,000 units per year. It has provided the following income statement data:

Traditional Format Contribution Margin Format
Sales revenue $4,920,000 Sales revenue $4,920,000
Cost of goods sold 2,900,000 Variable costs:
Gross profit 2,020,000 Manufacturing 1,000,000
Selling & admin. expenses 650,000 Selling & admin. 400,000
Contribution margin 3,520,000
Fixed costs:
Manufacturing 1,900,000
Selling & admin. 250,000
Operating income $1,370,000 Operating income $1,370,000

A foreign company has offered to buy 100 units for a reduced sales price of $300 per unit. The marketing manager says the sale will have no negative impact the company's regular sales. The sales manager says that this sale will not require any additional selling and administrative costs, as it is a one-time deal. The production manager reports that there is plenty of excess capacity to accommodate the deal without requiring any additional fixed costs. If Bridge accepts the deal, how will this impact operating income? (Round any intermediate calculations to the nearest cent, and your final answer to the nearest dollar.)
A) Operating income will increase by $29,917.
B) Operating income will decrease by $29,917.
C) Operating income will increase by $30,000.
D) Operating income will decrease by $30,000.

Answer 1

A .A)
Differential revenue (100 x $300 ) $30,000
Less: Differential cost (100 x $83.33*) 8,333
Differential profit $29,917
*Differential cost per unit = (1,000,000 / 12,000 ) = 83.33