#55

Wham Products, a maker of specialty products, is currently manufacturing and selling a product called Gory Goo. A discount department store, J-Mart, has made a one-time offer to purchase 56,000 units of Gory Goo at $5.00 per unit for sale in J-Mart stores. Since Wham has enough excess capacity, management would naturally like to produce and sell the additional units. But there is concern that $5.00 is below Gory Goo's unit manufacturing costs and well below its normal $8.85 selling price.

Last year, Gory Goo's unit sales were 390,000 and its total manufacturing costs were:

Direct material	$351,000
Direct labor	234,000
Variable overhead	273,000
Fixed Overhead	1,443,000
Total manufacturing	$2,301,000

In addition to the manufacturing costs, there were selling and administrative expenses associated with Gory Goo. Variable selling and administrative expenses were $1.40 per unit, and fixed selling and administrative expenses were $175,500.

For the special order, variable manufacturing costs per unit are expected to be the same as they were last year, but because the special order units are being sold directly to the J-Mart chain, variable selling and administrative expenses are expected to be only $1.10 per unit. Fixed costs will not be affected.

Even though the special order units will have a different name and packaging, Wham's marketing group still believes that approximately 5,000 units from the special order will be sold to customers who would normally purchase Gory Goo from Wham. If Wham accepts the offer from J-Mart, what will be the effect on firm profits?