The Following Information Relates to a Product Produced by Baywatch

Essay

The following information relates to a product produced by Baywatch Company:
$$\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 50 \\\hline \text { Direct labor } & 35 \\\hline \text { Variable overhead } & 30 \\\hline \text { Fixed overhead } & 40 \\\hline \text { Unit cost } & \$ 155 \\\hline\end{array}$$
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 income 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?