Leibnitz Company has been approached by a new customer with an offer to purchase 20,000 units of model TR8 at a price of $9 each. The new customer is geographically separated from the company's other customers, and existing sales would not be affected. Leibnitz normally produces 100,000 units of TR8 per year but only plans to produce and sell 75,000 in the coming year. The normal sales price is $14 per unit. Unit cost information for the normal level of activity is as follows:
Direct materials ............................... $3.00
Direct labour ................................... 2.80
Variable overhead ............................. 1.50
Fixed overhead ................................. 2.00
Total ................................................ $9.30
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?