FreeStyle manufactures a variety of recreational foot bags. FreeStyle's total production cost is \(\$ 4\) per HackySack foot bag, as follows:

Alba Athletics offers to buy 5,000 HackySack foot bags for \(\$ 3.00\) per bag. FreeStyle has enough excess capacity to handle the special order.

Requirements 

1. Prepare an incremental analysis to determine the impact on operating income if FreeStyle accepts the special sales order from Alba Athletics. Should FreeStyle accept the special order?

2. Now suppose that Alba wants FreeStyle to replace the hand-woven fabric with a three-panel design made of leather. FreeStyle will spend an additional \(\$ .40\) per bag to replace the fabric with leather. What will be the impact on operating income if FreeStyle increases its costs for this special order? Should FreeStyle accept the special order under these circumstances? 

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Variable costs: Direct materials Direct labor $0.50 0.95 Variable overhead 1.30 Fixed overhead Total cost 1.25 $4.00