Byways Production has an annual capacity of 80,700 units and currently manufactures 78,200 units per year. Each unit normally sells for $103 with variable costs of $65 per unit. An out-of-state distributor has offered to buy 5,500 units at $75 per unit, which Byways could fulfill using unused capacity without changing its cost structure. Accepting the special order would increase Byways' net operating income by $13,600.

1. Byways Production has an annual capacity of 80,700 units per year. Currently, the company is
making and selling 78,200 units a year. The normal sales price is $103 per unit; variable costs
are $65 per unit, and total fixed expenses are $2,000,000. An out-of-state distributor has offered
to buy 5,500 units at $75 per unit. Byways cost structure should not change as a result of this
special order.
Solution
Capacity
80700
Unit Manufactured
78200
Sale price/unit
103
Variable cost/unit
65
Contribution/ unit
38
Total contribution
2971600
Fixed cost
2,000,000

2. Operationg income
971,600
Unutilized Capacity =Total capacity- unit manufactured =2500
To fulfill the demand company has to sell 3000 (5500-2500) @75 to Out of state distributor from
the 78200 unit initially sold @ 105
Normal production
Out of state distributor
Unit Manufatured
77900
Unit Manufatured
2500
Sale price/unit
103
Sale price/unit
75
Variable cost/unit
65
Variable cost/unit
65
Contribution/ unit
38
Contribution/ unit
10
Total contribution

3. 2960200
Total contribution
25000
Fixed cost
2,000,000
Fixed cost
0
Operationg income
960,200
Operationg income
25,000
Net operating Income =960200+25000 = 985200
Increase in net operating income =985200-971600 =13600
Bill Net income will increase by $13600 if it accepts the special order
Capacity 80700
Unit Manufactured 78200
Sale price/unit 103
Variable cost/unit 65
Contribution/ unit 38
Total contribution 2971600
Fixed cost 2,000,000
Operationg income 971,600