Harrison Ford Company has been approached by a new customer with an offer to pur

Question

Harrison Ford Company has been approached by a new customer with an offer to purchase 10,000 units of its model IJ4 at a price of $4 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 IJ4 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:

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

Required:

Explanation / Answer

If you dont accept the order everything stays normal.

In case you accept the order you incur direct materials, direct labour and variable overhead totalling 1.5 + 2 + 1 = $4.5 and give $4 as income resulting in a loss of $0.5

If the order is accepted the operating income will decrease by 0.5 * 10000 = $5000

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