Winner Gifts manufactures and sells earphones. The unit selling price for a set of earphones is $18, and the variable cost is $8. The annual fixed cost is $360,000. The machine hour capacity is 32,000 hours. Currently, Winner Gifts is working at 95% of this capacity. The machine can make 2.5 units per hour.
A credit union would like to purchase 6,500 simplified earphone sets for promotional purposes. They request the credit union logo be incorporated into the design of the earphones. They offer to pay $12 per unit. Winner Gifts has to take the full order or nothing. Winner Gifts’ cost accountant has calculated costs associated with this special order: variable cost for the simplified earphone is $4 each, and the additional fixed costs incurred to make the credit union design and to rent a machine to make the logo are $40,000, in addition to the current fixed costs of $360,000. The machine can make 3.25 units of simplified earphones per hour.

REQUIRED

A. If Winner Gifts has the capacity to make both products, which product should be the priority? Please show your calculation.
B. What is the break-even in sales units for taking this special order?

C. What is the operating income that this special order will bring to Winner Gifts, ignoring the constraint on machine hours?
D. Is there an opportunity cost for taking this special order?
E. Based on the above calculations, should Winner Gifts take this special order?