Bonovich Company produces a single product with sales of 40,000 units and has the following unit costs: Direct materials $16 Direct labor $7 Variable overhead $7 Fixed overhead $10* *Based on total fixed overhead of $400,000 and units produced of 40,000. For the coming period, Bonovich has received an offer of a government contract of 10,000 units. The contract specifies a payment of $32 per unit plus a fee of $20,000 for the contract. The company's normal selling price is $40 per unit.

a) Assume that, if the contract is accepted, regular production and sales will be unaffected, and no alternative uses of the productive capacity will be foregone. Show whether the government contract should be accepted.

b) Assume that normal production will be decreased by one unit for every unit manufactured to fill the contract. Show whether, under these revised circumstances, the government contract should be accepted. Explain briefly in terms of opportunity costs.

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