ABC Inc., has been offered $35 for 1,000 summer-weight sleeping bags by a discount store. XYZ normally sells the bag for $47.50. The costs of the bag have been determined to be as follows:

Materials.................................... $15.00

Labor.......................................... 7.50

Variable overhead..................... 5.00

Fixed overhead.......................... 15.00

Total....................................... $42.50

Required:

1. If XYZ has excess capacity in its production line and has no alternative use for the space that is idle, should the special order be accepted? Explain your views. [3 marks]

2. Assume that XYZ is operating at full capacity. Should the order be accepted? Explain your views. [2 marks]