Question

malik machines manufactures motors for sailboats. the company has the capacity to produce 15,000 motors per year, but is currently producing and selling 13,000 motors per year. the following information relates to current production: sale price per unit $290 variable cost per unit: manufacturing $145 marketing and administrative $35 total fixed costs: manufacturing $845000 marketing and administrative $200,000 malik machines accepts a special sales order for 8000 motors at a price of $240 per unit. in order to do so, it decides to cut sales to regular clients. as a result of this decision, what is the change in operating income?

Answer 1

To determine the change in operating income when accepting a special sales order, we need to compare the operating income before and after accepting the order. By calculating the total revenue, total variable costs, and total fixed costs before and after the special sales order, we can find the change in operating income. In this case, the change in operating income is $760,000.

Step-by-step explanation:

To determine the change in operating income, we need to compare the operating income before and after accepting the special sales order. Before accepting the order, the company is producing and selling 13,000 motors per year. Let's calculate the operating income before the special sales order:

Total revenue = Sale price per unit * Number of units sold = $290 * 13,000 = $3,770,000

Total variable costs = Manufacturing variable cost per unit * Number of units sold + Marketing and administrative variable cost per unit * Number of units sold = $145 * 13,000 + $35 * 13,000 = $2,270,000

Total fixed costs = Manufacturing fixed costs + Marketing and administrative fixed costs = $845,000 + $200,000 = $1,045,000

Operating income = Total revenue - Total variable costs - Total fixed costs = $3,770,000 - $2,270,000 - $1,045,000 = $455,000

Now let's calculate the operating income after accepting the special sales order:

Total revenue from special sales order = Sale price per unit * Number of units in the special sales order = $240 * 8000 = $1,920,000

Total variable costs from special sales order = Manufacturing variable cost per unit * Number of units in the special sales order = $145 * 8000 = $1,160,000

Total revenue = Total revenue before the special sales order + Total revenue from special sales order = $3,770,000 + $1,920,000 = $5,690,000

Total variable costs = Total variable costs before the special sales order + Total variable costs from special sales order = $2,270,000 + $1,160,000 = $3,430,000

Total fixed costs remain the same.

Operating income after accepting the special sales order = Total revenue - Total variable costs - Total fixed costs = $5,690,000 - $3,430,000 - $1,045,000 = $1,215,000

The change in operating income is the difference between the operating income after accepting the special sales order and the operating income before the special sales order:

Change in operating income = Operating income after accepting the special sales order - Operating income before the special sales order = $1,215,000 - $455,000 = $760,000