Near the end of 2016, I brought in a special order from Target for 100,000 watches at $16

each. I said Id accept a flat $20,000 sales commission instead of the usual 6% of selling price, but my

sister refused the order. She usually upheld a relatively rigid pricing policy, saying that it was bad

business to accept orders that did not at least generate full manufacturing cost plus 80% of full

manufacturing cost.

That policy bothered me. We had idle capacity. The way I figured, our manufacturing costs would go up

by 100,000 x $11 = $1,100,000, but our selling and administrative expenses would go up by only

$20,000. That would mean additional operating income of 100,000 x ($16 - $11) minus $20,000, or

$500,000 minus $20,000, or $480,000. Thats too much money to give up just to maintain a general

pricing policy. Was my analysis of the impact on operating income correct? If not, please show me the

correct additional operating income.

Here is the contribution format income statement:

Heartland Watches Contribution Format Income Statement For the Year Ended December 31, 2016 Sales $ 40,000,000.00 Variable Manufacturing Cost $ 18,000,000.00 Total Variable Expenses Contribution Margin Fixed Expenses $4,000,000.00 $ 6,000,000.00 $10,000,000.00 $3,000,000.00 Fixed Manufactoring Overhead Fixed Selling& Administrative Expense Total Fixed Expenses Net Operating Income