Luna Company makes special equipment used in cell towers. Each unit sells for $420. Luna produces and sells 12,700 units per year. They have provided the following income statement data: Traditional Format Contribution Margin Format Sales revenue $5,334,000 Sales revenue $5,334,000 Cost of goods sold 2,100,000 Variable costs: Gross profit 3,234,000 Manufacturing 900,000 Selling & admin. expenses 660,000 Selling & admin. 400,000 Contribution margin 4,034,000 Fixed costs: Manufacturing 1,200,000 Selling & admin. 260,000 Operating income $2,574,000 Operating income $2,574,000 A foreign company has offered to buy 75 units for a reduced sales price of $320 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 variable selling and administrative costs. The production manager reports that there is plenty of excess capacity to accommodate the deal without requiring any additional fixed costs. If Luna 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 increase by $24,000. B. Operating income will decrease by $16,322. C. Operating income will decrease by $24,000. D. Operating income will increase by $16,322.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Luna Company makes special equipment used in cell towers. Each unit sells for

$420.

Luna produces and sells

12,700

units per year. They have provided the following income statement data:

Traditional Format		Contribution Margin Format
Sales revenue	$5,334,000	Sales revenue	$5,334,000
Cost of goods sold	2,100,000	Variable costs:
Gross profit	3,234,000	Manufacturing	900,000
Selling & admin. expenses	660,000	Selling & admin.	400,000
		Contribution margin	4,034,000
		Fixed costs:
		Manufacturing	1,200,000
		Selling & admin.	260,000
Operating income	$2,574,000	Operating income	$2,574,000

A foreign company has offered to buy

units for a reduced sales price of

$320

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 variable selling and administrative costs. The production manager reports that there is plenty of excess capacity to accommodate the deal without requiring any additional fixed costs. If Luna 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.)

Operating income will increase by

$24,000.

Operating income will decrease by

$16,322.

Operating income will decrease by

$24,000.

Operating income will increase by

$16,322.

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