Exercise 23-13 (Algo) Special offer pricing LO P7

Farrow Company reports the following annual results.

Contribution Margin Income Statement	Per Unit	Annual Total
Sales (400,000 units)	$ 15.00	$ 6,000,000
Variable costs
Direct materials	2.00	800,000
Direct labor	4.00	1,600,000
Overhead	2.50	1,000,000
Contribution margin	6.50	2,600,000
Fixed costs
Fixed overhead	2.00	800,000
Fixed general and administrative	1.50	600,000
Income	$ 3.00	$ 1,200,000

The company receives a special offer for 40,000 units at $13 per unit. The additional sales would not affect its normal sales. Variable costs per unit would be the same for the special offer as they are for the normal units. The special offer would require incremental fixed overhead of $160,000 and incremental fixed general and administrative costs of $172,000. (a) Compute the income or loss for the special offer. (b) Should the company accept or reject the special offer?