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Deprecated Deprecated
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Posts: 2784
8 years ago
Spirit Company makes special equipment used in cell towers. Each unit sells for $400. Spirit produces and sells 12,500 units per year. They have provided the following income statement data:

Traditional Format      Contribution Format   
Revenue   $5,000,000   Revenue   $5,000,000
Cost of goods sold   2,100,000   Variable costs:   
Gross profit   2,900,000        Manufacturing   900,000
Selling & admin. expenses   550,000        Selling & admin.   300,000
      Contribution margin   3,800,000
      Fixed costs:   
           Manufacturing   1,200,000
           Selling & admin.   250,000
Operating income   $2,350,000   Operating income   $2,350,000

A foreign company has offered to buy 85 units for a reduced sales price of $350 per unit. The marketing manager says the sale will not affect the company's regular sales. The sales manager says that this sale will require additional selling and administrative costs, as it is a one-time deal. The production manager reports that there is plenty of excess capacity to accommodate the deal without requiring any additional fixed costs. If Spirit accepts the deal, how will this impact operating income? (Round any intermediate calculations to the nearest cent, and your final answer to the nearest dollar.)
A) Operating income will decrease by $21,590.
B) Operating income will increase by $29,750.
C) Operating income will increase by $21,590.
D) Operating income will decrease by $29,750.
Textbook 
Horngren's Financial & Managerial Accounting, The Financial Chapters

Horngren's Financial & Managerial Accounting, The Financial Chapters


Edition: 5th
Authors:
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TanksTanks
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8 years ago
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Deprecated Author
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8 years ago
Thanks!
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