Structuring a Special$-$Order Problem

Harrison Ford Company has been approached by a new customer with an offer to purchase $10,000$ units of its model IJ$5$ at a price of $$4\mathrm{.}10$ each. The new customer is geographically separated from the company's other customers, and existing sales would not be affected. Harrison normally produces $75,000$ units of IJ$5$ per year but only plans to produce and sell $60,000$ in the coming year. The normal sales price is $$12$ per unit. Unit cost information for the normal level of activity is as follows:

Direct materials $$1\mathrm{.}75$

Direct labor $2\mathrm{.}50$

Variable overhead $1\mathrm{.}50$

Fixed overhead $3\mathrm{.}25$

Total $$9\mathrm{.}00$

Fixed overhead will not be affected by whether or not the special order is accepted.

Required:

$1.$ Should the company accept or reject the special order?

Reject

$2.$ By how much will operating income increase or decrease if the order is accepted?

Decrease

by