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Coconut Company produces and sells 40,000 bottles of coconut milk each year. The following information reflects a breakdown of its costs: Cost Item Costs per

Coconut Company produces and sells 40,000 bottles of coconut milk each year. The following information reflects a breakdown of its costs:

Cost Item

Costs per Bottle

Total Costs

Variable production costs

$10

$400,000

Fixed production costs

$7

$280,000

Variable selling costs

$4

$160,000

Fixed selling and administrative costs

$2

$80,000

Total costs

$23

$920,000

Coconut marks up its prices 35% over full costs. It has surplus capacity to produce 20,000 more bottles. A Dutch supermarket company has offered to purchase 12,000 bottles of the product at a special price of $26 per bottle. Coconut will incur additional shipping and selling costs of $1 per bottle to complete this order.

Required: (a) What will be the effect on Coconut's operating income if it accepts this order? (b) Analyze the effect on the company's overall contribution margin.

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