Tania Company manufactures watches. A national sporting goods chain recently submitted a special order for 4,000 sport watches. Tania was not operating at capacity and could use the extra business. Unfortunately, the orders offering price of RM17 per watch was below the cost to produce the watches. The controller did not agree to take a loss on the deal. However, the personnel manager argued in favor of accepting the order even though a loss would be incurred: it would avoid the problems of layoff and would help maintain the community image of the company. The following information is the full cost to produce a sport watch:

Details Unit Cost RM Direct materials 6.50 Direct labor 5.00 Variable overhead 3.25 Fixed overhead 2.50 Total 17.25

No variable selling or administrative expenses would be associated with the order.

Required:

1, List the relevant costs of the two alternatives of the special order..

2. Propose whether operating income increase or decrease if the order is accepted with calculation details.