16 Points. Important: You must show computations

Circus Toys produces a plastic three-ring circus set. The set sells for $98. The capacity of the plant is 20,000 sets per year. Production costs are as follows for 20,000 sets:

	Per unit
Direct materials	$ 10.00
Direct labor	15.00
Variable overhead	20.00
Variable Selling costs	5.00
Fixed overhead	40.00
Total Cost	90.00
	========

A Canadian store, which had previously not purchased from Circus Toys, has approached the marketing manager about buying 6,000 sets for $88.50/set. No selling expenses would be incurred in this offer, but the Canadian firm wants its store name put on the package, which means an additional $1 cost per unit to Circus Toys. Because the company is currently selling 19,000 sets, acceptance of this special order would require it to reject some of its current business.

1. (8 Points) How much better or worse off is Circus Toys if they accept the special order? Show computations.

2. (8 Points) Suppose Circus Toys could increase plant capacity to 25,000 sets, but the fixed costs per unit would then become $41/set (based on 25,000 sets). If they increase capacity, what is the minimum price they should set for the special order if they want to be no worse off than before the special order offer?

The minimum price they should set should be $50 if they want to be worse off than before