The following information relates to current production of outdoor chaise lounges at Backyard Posh: The regular selling price per chaise lounge is $280. The company is analyzing the opportunity to accept a special sales order for 900 chaise lounge at a price of $210 per unit. Fixed costs would remain unchanged. The company has the capacity to produce 65,000 chaise lounges per year, but is currently producing and selling 9000 chaise lounges per year. The 900 units would not require any variable marketing and administrative expenses. Regular sales will not be affected by the special order. If the company were to accept this special order, how would operating income be affected?
A)Decrease by $63,900
B)Decrease by $95,400
C)Increase by $63,900
D)Increase by $95,400

Question

The following information relates to current production of outdoor chaise lounges at Backyard Posh:  The regular selling price per chaise lounge is $280. The company is analyzing the opportunity to accept a special sales order for 900 chaise lounge at a price of $210 per unit. Fixed costs would remain unchanged. The company has the capacity to produce 65,000 chaise lounges per year, but is currently producing and selling 9000 chaise lounges per year. The 900 units would not require any variable marketing and administrative expenses. Regular sales will not be affected by the special order. If the company were to accept this special order, how would operating income be affected?
A)Decrease by $63,900 
B)Decrease by $95,400 
C)Increase by $63,900 
D)Increase by $95,400

Quizplus · Accepted Answer

The contribution margin per unit can be calculated as follows: 
Selling price per unit - variable cost per unit 
= $280 - $0 = $280

If the company were to accept the special sales order, the contribution margin per unit would be: 
Selling price per unit - variable cost per unit 
= $210 - $0 = $210

The total contribution margin from the special sales order would be: 
900 x $210 = $189,000

Since the 900 units would not require any variable marketing and administrative expenses, the total increase in operating income would be equal to the total contribution margin from the special sales order: 
Total increase in operating income = $189,000

Therefore, the operating income would increase by $189,000 if the company were to accept the special sales order.

The Following Information Relates to Current Production of Outdoor Chaise