Bob makes widgets. Variable costs per unit are $2. Fixed cost per unit (at an output level of 100) are $1 per unit. The normal sales price per unit is $5. A customer approaches Bob offering to buy 40 widgets for $4 each. Assume Bob has excess capacity.

1) What is the effect on operating income if he accepts the order? Additional revenue additional cost = effect on oper. income. Fixed costs wont change so additional costs = VC

2) Assume that, to fill the special order, Bob must buy and completely use up (no future use) a special material for $50. What is the effect on operating income if he accepts the order? Consider the special material to be part of the additional cost specific to this order.

3) Assume the need for the special material as in #2. Also, assume there is no excess capacity. What price would Bob need to charge for the special order so that operating income will be the same whether or not he accepts the special order?