Aerotoy Company makes toy airplanes. One plane is an excellent replica of a 737; it sells for $5. Vacation Airlines wants to purchase 12,000 planes at $1.75 each to give to children flying unaccompanied. Costs per plane are as follows: No variable marketing costs would be incurred. The company is operating significantly below the maximum productive capacity. No fixed costs are avoidable. However, Vacation Airlines wants its own logo and colors on the planes. The cost of the decals is $0.01 per plane and a special machine costing $1,500 would be required to affix the decals. After the order is complete, the machine would be scrapped. Should the special order be accepted?
A) Yes, income will increase by $300.
B) No, income will decrease by $180.
C) No, income will decrease by $1,500.
D) Yes, income will increase by $180.
E) It doesn't matter; there will be no change in income.

Question

Aerotoy Company makes toy airplanes. One plane is an excellent replica of a 737; it sells for $5. Vacation Airlines wants to purchase 12,000 planes at $1.75 each to give to children flying unaccompanied. Costs per plane are as follows:  No variable marketing costs would be incurred. The company is operating significantly below the maximum productive capacity. No fixed costs are avoidable. However, Vacation Airlines wants its own logo and colors on the planes. The cost of the decals is $0.01 per plane and a special machine costing $1,500 would be required to affix the decals. After the order is complete, the machine would be scrapped. Should the special order be accepted?
A) Yes, income will increase by $300. 
B) No, income will decrease by $180. 
C) No, income will decrease by $1,500. 
D) Yes, income will increase by $180. 
E) It doesn't matter; there will be no change in income.

Quizplus · Accepted Answer

First, let's calculate the variable cost per plane:

$2.75 ($1.75 + $1.00 for decals)

Next, we can calculate the total variable cost for the 12,000 planes:

$2.75 * 12,000 = $33,000

The total revenue from the order would be:

$5 * 12,000 = $60,000

Therefore, the contribution margin would be:

$60,000 - $33,000 = $27,000

However, we need to factor in the cost of the special machine:

$27,000 - $1,500 = $25,500

So we can see that the company will earn $25,500 from the special order. As a result, accepting the special order would increase the company's income by $180 ($25,500/12,000 planes). Therefore, the best answer is D.

Aerotoy Company Makes Toy Airplanes