Recently Wang Company was approached by a new customer with an offer to purchase 10,000 units of its model IJ4 at a price of $4 each. Normally Wang Company produces 75,000 units of the IJ4, which the company sells for $12 per unit. In the coming year, the company expects to produce and sell only 60,000 units. Accepting this offer will not affect sales to the company's other customers. Unit cost information for the normal level of activity is as follows:
Direct materials ...................................... $1.50
Direct labour .......................................... 2.00
Variable overhead .................................... 1.00
Fixed overhead ....................................... 3.25
Total ................................................... $7.75
Fixed overhead will not be affected by whether or not the special order is accepted.
Required:
1. What are the relevant costs and benefits of the two alternatives (accept or reject the special order)?
2. By how much will operating income increase or decrease if the order is accepted?