SHORT PROBLEM

A company is considering whether to accept additional business. They are operating at 85% of full capacity. At this level, per unit and annual costs are as follows:

		Unit Cost		Annual Costs
Sales		$5.00		$425,000
Costs:
	Direct materials	$1.25		106,250
	Direct labor	1.75		148,750
	Factory overhead	.50		42,500
	Other expenses	.50		42,500
Total costs		4.00		$340,000
Operating Income		1.00		85,000

A current buyer has offered to purchase an additional 10,000 units for $3.50 per unit. The following information is relevant to assist management in making the decision concerning whether to sell these additional units at less than the current cost of $4.00 per unit: Manufacturing the additional units requires the normal direct materials and direct labor costs. Total incremental overhead costs are $2,500. Total incremental other expenses are $2,000.

Required (Show work and all steps)

1. Determine the relevant costs per unit to make the 10,000 additional units:

2. Determine the total operating income related to the 10,000 additional units:

Sales
Costs:
	Direct materials
	Direct labor
	Factory overhead
	Other expenses
Total costs
Operating Income

3. Should the company accept the offer to make 10,000 additional units at $3.50 each and why?