Clear Sky Sailmakers manufactures sails for sailboats. The company has the capac

Question

Clear Sky Sailmakers manufactures sails for sailboats. The company has the capacity to produce 15,000 sails per year, but is currently producing and selling 10,000 sails per year.

The following information relates to current production: If a special sales order is accepted for 2,500 sails at a price of $205 per unit, fixed costs increase by $14,000, and variable marketing and administrative costs for that order are $25 per unit, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A. Increase by $23,500

B. Decrease by $23,500

C. Increase by $37,500

D. Increase by $86,000

(When I solved this on my own I came to C. 37500 increase, but my teachers solution said that the answer is A. 23,500 increase. Is this a mistake on her part or mine, If it is my mistake can you please explain why?)

Explanation / Answer

Effect on operating income would be:

**Fixed cost is generally not relevant while deciding whether to accept offer or not as it remain same /constant whether offer is accepted or not .

However it is said in question that acceptance of offer will lead to increase in fixed cost of $ 14000 ,which means fixed cost will increase only when offer is accepted otherwise not .so increase in fixed cost is relevant in this part. therefore should be considered whilc making calculation for net income.

sales (2500 *205) 512500 less:Variable manufacturing (2500 * 165) (412500) less:vARIABLE Marketing cost (25 *2500) (62500) Fixed cost [Relevant **because it increases with acceptance of order] (14000) net income 23500

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