1.Should the offer be accepted on financial grounds? Please show all calculations leading to your conclusion. 2. In the situation outlined above, why is spare capacity an important consideration in the decision to accept or reject special orders? 3. What are sunk costs and why should they be excluded from decision making? Outline an example illustrating the concept of sunk costs.

Bocchi Company manufactures and sells musical instruments and accessories. The company has spare capacity in its production facility. Sound Euphonium Pte Ltd has approached Bocchi Company and asked Bocchi Company to manufacture 10,000 units of Special Variant Musical Instrument Y. To adhere to Sound Euphonium's requirements in respect of the Special Variant Musical Instrument Y, Bocchi Company will have to spending additional direct labour hours which will result in an increase of 10% in direct labour cost per unit. Bocchi Company will also need to incur an additional set-up cost $10,000 to produce this Special Variant. Sound Euphonium is willing to pay $73 per unit for this Special Variant order. This price is below what Bocchi Company typically sells the product. Bocchi Ltd's management accountant reports the following costs for making a unit of Standard Version Musical Instrument Y