ABC Corp. manufactures a variety of industrial valves and pipe fittings that are sold to customers. Currently, the company operates at 70% capacity.

XYZ Corp. has approached management with an offer to buy 120,000 units of a pressure valve. XYZ Corp. manufactures a valve that is almost identical to ABCs valve; however, a fire in XYZ valve plant has shut down its manufacturing operations. XYZ needs the 120,000 valves over the next four months to meet commitments to its regular customers; the company is prepared to pay $21 for each valve.

ABCs product cost for the pressure valve, based on current attainable standard, is: direct materials - $6, direct labor (0.5 h per valve) - $8, manufacturing overhead (of which 1/3 is variable) - $9. Total unit manufacturing cost is $23.

Additional costs incurred in connection with sales of the pressure valve are sales commissions of 6% and freight expense of $1.5 per unit. However, the company does not pay sales commissions on special orders that come directly to management. Freight expense will be paid by XYZ Corp.

ABC has set its selling price at $30 to maintain market share.

Production management believes that it can handle the XYZ Corp. offer without disrupting its scheduled production. The order will, however, require additional factory overhead of $10,000 per month in the form of supervision and clerical costs.

If management accepts the order, ABC will manufacture and ship 30,000 pressure valves to XYZ Corp. each month for the next four months. Shipments will be made in weekly consignments.

1) Prepare an analysis showing the impact on operating profit of accepting the XYZ offer.

2) Calculate the minimum unit price that ABCs management could accept for the special order without reducing operating income.