Hughes Supply manufactures a variety of boating goods, including floating life jackets. Costs for the current level of production of 18,000 life jackets is as follows:

Sales	$270,000
Variable Costs
Variable Manufacturing Costs	$126,000
Variable Selling and Administrative Costs	$63,000
Contribution Margin	$81,000
Fixed Costs
Fixed Manufacturing Overhead	$100,000
Fixed Selling and Administrative Costs	$40,000
Operating Income	-$59,000

Assume that Michael Ltd. would like to purchase 5,000 life jackets at a price of $12 from Hughes. If Hughes decides to accept this special offer it estimates that it would lose 10% of its normal customers due to knowledge that a reduced price was given to a new customer. Variable Selling and Administrative costs would be reduced by $2 per unit on the special offer.

Assume that Hughes has sufficient idle capacity to fulfill the special offer. How much would Hughes' operating income change if they accepted the special offer and what should Hughes do?

• A.

  $9,400 increase in operating income Accept the Special Offer.

• B.

  $5,800 increase in operating income Accept the Special Offer.

• C.

  $17,500 increase in operating income Accept the Special Offer.

• D.

  $7,500 increase in operating income Accept the Special Offer.

Reset Selection

Question 2 of 474 Points

Assume that Hughes' capacity is 20,000 life jackets. How much would Hughes' operating income change if they accepted the special offer and what should Hughes do?

• A. $6,000 decrease in operating income Reject the Special Offer.
• B. $4,000 increase in operating income Accept the Special Offer.
• C. $12,100 increase in operating income Accept the Special Offer.
• D. $2,000 decrease in operating income Reject the Special Offer.