The Following Information Relates to a Product Produced by Baywatch

Essay

The following information relates to a product produced by Baywatch Company:
$$\begin{array} { l r } \text { Direct materials } & \$ 50 \\\text { Direct labor } & 35 \\\text { Variable overhead } & 30 \\\text { Fixed overhead } & 40 \\ \text { Unit cost } & \$ 155\end{array}$$
Fixed selling costs are $1,000,000 per year. Although production capacity is 900,000 units per year, Baywatch expects to produce only 800,000 units next year. The product normally sells for $180 each. A customer has offered to buy 60,000 units for $150 each. The customer will pay the transportation charge on the units purchased.
Required:
a. Compute the effect on operating profits if Baywatch accepts the special order.
b. If Baywatch accepts the special order, how much could normal sales drop before all of the differential profits disappear?