Diaz Telecom had a fixed factory overhead budget for 2007 of $1 million. The company planned to make and sell 200,000 units of the product—a communications device. All variable manufacturing costs per unit were $10. The budgeted income statement contained the following:

For simplicity, assume that the actual variable costs per unit and the total fixed costs were exactly as budgeted.
1. Compute Diaz’s budgeted fixed factory overhead per unit.
2. Near the end of 2007, a large computer manufacturer offered to buy 10,000 units for $120,000 on a one-time special order. The president of Diaz 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 $1,000 fee paid to our sales agent.” Compute the effect on operating income if the offer is accepted.
3. What factors should the president of Diaz consider before finally deciding whether to accept the offer?
4. Suppose the original budget for fixed manufacturing costs was $1 million, but budgeted units of product were 1 million. How would your answers to requirements 1 and 2 change? Be specific.

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Sales Manufacturing cost of goods sold Gross margin Selling and administrative expenses Operating income $4,000,000 3,000,000 1,000,000 400,000 $ 600,000