Kester Electronics had a fixed factory overhead budget for 20X0 of $72 million. The company planned to make and sell 9 million units of a particular communications device. All variable manufacturing costs per unit were $18. The budgeted income statement contained the following:

Sales ……………………………………… $252,000,000

Manufacturing cost of goods sold ………… 234,000,000

Gross margin ………………………………. 18,000,000

Deduct selling and administrative expenses … 9,000,000

Operating income …………………………. $ 9,000,000

For simplicity, assume that the actual variable costs per unit and the total fixed costs were exactly as budgeted.

1. Compute Kester’s budgeted fixed factory overhead per unit.

2. Near the end of 20X0, a large computer manufacturer offered to buy 150,000 units for $3.45 million on a one-time special order. The president of Kister stated, “The offer is a bad deal. It’s foolish to sell below full manufacturing costs per unit. I realize that this order will have only a modest effect on selling and administrative costs. They will increase by a $10,000 fee paid to our sales agent.” Compute the effect on operating income if the offer is accepted.

3. What factors should the president of Kester consider before finally deciding whether to accept the offer?

4. Suppose the original budget for fixed manufacturing costs was $72 million, but budgeted units of product were 4.5 million. How would your answers to numbers 1 and 2 change? Be specific.