Relevant-cost approach to short-run pricing decisions. The Tectronics Company is an electronics business with eight product lines. Income data for one of the products (XT-107)

for the month just ended (June 2007) are as follows:

Sales, 200,000 units at average price of $120 $24,000,000 Variable costs:
$8,400,000 2,400,000 1,200,000 3,600,000 1,200,000 Total variable costs Contribution margin Fixed costs Operating income Direct materials at $42 per unit Direct manufacturing labour at $12 per unit Variable manufacturing overhead at $6 per unit Sales commissions at 15% ofsales Other variable costs at $6 per unit 16,800,000 7,200,000 6,000,000 $ 1,200,000 Abrams, Inc., an instruments company, has a problem with its preferred supplier of XT-107 component products. This supplier has had a three-week labour strike and will not be able to supply Abrams with 3,000 units next month. Abrams approaches the sales repre¬
sentative, Sarah Holtz, ofthe Tectronics Company about providing 3,000 units ofXT-107 at a price of $96 per unit. Holtz informs the XT-107 product manager, Jim Vijayan, that she would accept a flat commission of $7,200 rather than the usual 15% ifthis special order were accepted. Tectronics has the capacity to produce 300,000 units of XT-107 each month, but demand has not exceeded 200,000 units in any month in the last year.
Required 1. Ifthe 3,000-unit order from Abrams is accepted, what will be the effect on monthly operating income? (Assume the same cost structure as occurred inJune 2007.)
2. Vijayan ponders whether to accept the 3,000-unit special order. He is afraid of the prece¬
dent that might be set by cutting the price. He says, “The price is below our full cost of $114 per unit. I think we should quote a full price, or Abrams will expect favoured treat¬
ment again and again if we continue to do business with them.” Do you agree with Vijayan? Explain.