Question
Freewave Company manufactures sonars for fishing boats. Model 100 sells for $200. Freewave produces and sells 5,000 of them per year. Cost data are as
Freewave Company manufactures sonars for fishing boats. Model 100 sells for $200. Freewave produces and sells 5,000 of them per year. Cost data are as follows:
Variable manufacturing | $105.00 | Per unit |
Variable marketing | $5.00 | Per unit |
Fixed manufacturing | $270,000 | Per year |
Fixed marketing & admin | $140,000 | Per year |
A foreign company has offered to make a one-time purchase of 20 units at a price of $150 per unit. The marketing manager says that this sale will not affect Freewave's normal sales activity, and it will not require any variable marketing costs. The production manager says that the company is working nearly at capacity and will have to take on additional fixed costs of $1,000 per year in order to accommodate the deal. If Freewave accepts the sale, how will it affect operating income?
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