Spirit Company makes special equipment used in cell towers

Question

Each unit sells for $400. Spirit produces and sells 12,500 units per year. They have provided the following income statement data:

Traditional Format Contribution Format
Revenue $5,000,000 Revenue $5,000,000
Cost of goods sold 2,100,000 Variable costs:
Gross profit 2,900,000 Manufacturing 900,000
Selling & admin. expenses 550,000 Selling & admin. 300,000
Contribution margin 3,800,000
Fixed costs:
Manufacturing 1,200,000
Selling & admin. 250,000
Operating income $2,350,000 Operating income $2,350,000

A foreign company has offered to buy 85 units for a reduced sales price of $350 per unit. The marketing manager says the sale will not affect the company's regular sales. The sales manager says that this sale will require 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 Spirit 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 $21,590.
B) Operating income will decrease by $21,590.
C) Operating income will increase by $29,750.
D) Operating income will decrease by $29,750.

Answer 1

A .A)
Expected increase in revenues (85 x 350 ) $29,750
Less: expected increase in costs
Variable manufacturing (85 x 72.00*) 6,120.00
Variable selling & administrative (85 x 24.00**) 2,040.00 8,160.00
Expected increase in operating revenue $21,590

*Variable manufacturing cost per unit = 900,000 / 12,500 = $72.00
**Variable selling and administrative expenses per unit = 300,000 / 12,500 = $24.00