Dear Chegg Tutor,

I got the answer for the problem below ($540,000 increase). However, I do not understand why the Fixed selling costs of $500,00 per year are not being counted here. I am always mixed up on whether to add or not to add the fixed cost. Please explain.

The following information relates to a product produced by Malkovich Company:

Direct materials $24. Direct labor $15. Variable overhead $30. Fixed overhead $18. Unit cost $87

Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although production capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product normally sells for $120 each. A customer has offered to buy 60,000 units for $90 each. If the firm produces the special order, the effect on income would be?

a. $360,000 increase. b. $360,000 decrease. c. $540,000 decrease. d. $540,000 increase.