(Special Order) Dresden Company has been approached by a new customer with an offer to purchase 2,000 units of model WQ-8 at a price of $7 each. The new customer is geographically separated from the companys other customers, and existing sales would not be affected. Dresden normally has a total capacity of 23,000 units of WQ-8 per year but produces and sells 20,000 units in this year. The normal sales price is $15 per unit. Unit cost information for the normal level of activity is as follows:

Direct materials $2.60 Direct labor 1.90 Variable overhead 1.20 Fixed overhead 2.00 Total $7.70

1. What are the relevant costs and benefits of the two alternatives (accept or reject the special order)? Explain you answer. 2. By how much will operating income increase or decrease if the order is accepted? 3. What will be your answer if the total capacity were 20,000 units instead of 23,000 units (the special offer is for 2,000 units, that means we may not deliver less than 2,000 units)? Prove your answer by showing loss/gain in contribution. Thereafter, prepare two income statements; one for the current situation and another one for the situation, if we accept this offer.