Assume the following additional cost data are available for FYX1 for ethernet repeaters:

Selling price per unit $360.00

Average variable cost per unit

Direct materials $82.70

Direct labor $40.00

Manufacturing overhead $29.60

Selling expense $20.50

Annual total fixed costs

Manufacturing overhead $8,500,000

Selling expense $2,250,000

Administrative expense $2,250,000

As a result of changes in macroeconomic conditions, you expect the cost of direct labor to increase 18% in FYX2. Fixed administrative costs are also expected to increase in FYX2 by $300,000 due to salary increases. All other costs and expenses are expected to remain the same as in FYX1. Your divisions operating income target for FYX2 is $2.5 million.

To diversify your divisions product mix, you are considering expanding your product line in the coming year by introducing a second product, a standard router. Projected revenue and cost data for the router are as follows:

Selling price per router $300.00

Variable costs per router

Direct materials $25.50

Direct labor $27.50

Manufacturing overhead $30.00

Selling expenses $7.00

If you decide to introduce this router in FYX2, then no additional manufacturing facilities or capacity would be required. Fixed advertising costs, however, would increase by $125,000 to promote both ethernet repeaters and routers. Your companys marketing department estimates one router would be sold for every three ethernet repeaters during the new products introductory phase, which is expected to span the next 18 months.

Assume your division chose to introduce routers in FYX2. You have been approached by a new customer, KMB Technology, to fulfill a one-time special order for a modified version of your divisions router that would require special materials and a modified production process. KMB wants to purchase 10,000 units of this special router at $150 per unit. Your division has enough excess capacity to produce the modified router for KMB without interfering with existing business. The materials required for this special order will cost 20% more than materials for the standard router and a new machine that costs $210,000 will be required. Otherwise, all manufacturing costs would be the same as the costs to produce routers for regular customers. Assume the new machine required for this special order has no alternate uses and no salvage value. No sales commissions would be paid on this special order.

Your first reaction to this special order is negative because KMB wants to pay significantly less than the $300 selling price regular customers pay for standard routers. Additionally, this special router would be costlier to produce because it requires more expensive materials and an expensive new machine. If this modified router is costlier to produce and KMB pays a lower price, then this deal might not be profitable for your division.

a. What will be the change in your divisions operating income if you accept KMB Technologys special order? b. What is the lowest selling price per unit you should accept for this modified router for KMB Technology?