The Production Division produces and sells 150,000 toy pianos. Maximum capacity is 200,000

toy pianos.

The unit cost of manufacturing one toy piano is as follows (for 150,000 pianos):

Direct materials

$10

Direct labor

2

Variable overhead

3

Fixed overhead

5

Total manufacturing cost

$20

Other costs incurred by the Production Division are as follows:

Total fixed selling and administrative expenses

$500,000

Variable selling

$1 per unit

Currently, the Production Division is selling toy pianos to external customers for $29.

The Special Order Customer wants to buy 50,000 toy pianos. The variable selling expenses are

avoided if the toy pianos are sold to the Special Order Customer.

1. Assume that the Production division is capable of producing 200,000 toy pianos per year (so,

it has extra capacity to produce additional 50,000 units). What is the minimum amount that

the Production Division should accept for the special order?

2. What is net operating income of the Production Division if they accept the special order price

of $20?

3. Now, consider the original facts and assume that the Production Division is already operating

at full capacity. What is the minimum amount the Production Division should accept for the

special order?