Problem 10-5A (Algo) Special offer pricing LO P7

JART manufactures and sells underwater markers. Its contribution margin income statement follows.

Contribution Margin Income Statement
For Year Ended December 31	Per Unit	Annual Total
Sales (550,000 units)	$ 7.00	$ 3,850,000
Variable costs
Direct materials	1.59	874,500
Direct labor	0.41	225,500
Variable overhead	0.90	495,000
Contribution margin	4.10	2,255,000
Fixed costs
Fixed overhead	0.20	110,000
Fixed general and administrative	0.15	82,500
Income	$ 3.75	$ 2,062,500

A potential customer offers to buy 65,000 units for $3.70 each. These sales would not affect the companys sales through its normal channels. Details about the special offer follow.

• Direct materials cost per unit and variable overhead cost per unit would not change.
• Direct labor cost per unit would be $0.59 because the offer would require overtime pay.
• Accepting the offer would require incremental fixed general and administrative costs of $6,500.
• Accepting the offer would require no incremental fixed overhead costs.

Required: 1. Compute income from the special offer. 2. Should the company accept or reject the special offer?