1. Special Order. At the Adisa Company's current activity level of 10,000 units per month, the costs of producing and selling one unit of the company's only product are as follow:

Direct materials

$6

Direct labour

$4

Variable manufacturing overhead

$1

Fixed manufacturing overhead

$8

Variable selling and administrative expenses

$4

Fixed selling and administrative expenses

$4

The normal selling price is $28 per unit. An order has been received from a potential customer overseas for 5000 units at a price of $26 per unit. This order would not affect regular sales. The company's capacity is 15,000 units per month and though excess capacity exists for this order.

Required:

1. If the order is accepted, by how much will monthly profits increase or decrease? (The order would not change the company's total fixed costs)

2. Assume the company has 1000 units of this product left over from last year that are inferior to the current model. The units might be sold through regular channels at reduced price. What unit cost is relevant for establishing a minimum selling price for these units? Explain.