Question

Pisces Company manufactures sonars for fishing boats. Model 100 sells for $ 300. Pisces produces and sells 5 comma 000 units per year. Cost data are as​ follows: Variable manufacturing $ 95 per unit Variable selling and administrative $ 6 per unit Fixed manufacturing $ 280 comma 000 per year Fixed selling and administrative $ 120 comma 000 per year An offer has come in for a oneminustime sale of 300 units at a special price of $ 120 per unit. The marketing manager says that the sale will not affect the​ company's regular sales​ activities, and that it will not require any variable selling and administrative costs. The production manager says that there is plenty of excess capacity and the sale will not impact fixed costs in any way. What is the effect of this deal on operating​ income

Answer 1

Revised Net operating Profit = $595,000 + $7,500 = $602,500

Thus The net impact of this deal on operating income is increase by $7,500.

Step-by-step explanation:

Present operating income is as follows:

Sales = $300 X 5,000 = $1,500,000

Less: Variable Costs

Manufacturing = $95 X 5,000 = $475,000

Selling and Administrative = $6 X 5,000 = $30,000

Contribution margin = $995,000

Less: Fixed cost

Manufacturing = $280,000

Selling & Administrative = $120,000

Current Operating Income = $595,000

Provided with new order no selling & administrative cost to be incurred also fixed cost will not change as it is in the capacity fixed.

In case order is considered

Additional Revenue shall be as follows:

Sales = $120 X 300 = $36,000

Less:

Variable Manufacturing cost $95 X 300 = $28,500

Operating Profit = $7,500

Revised Net operating Profit = $595,000 + $7,500 = $602,500

Thus The net impact of this deal on operating income is increase by $7,500.