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The following information relates to a product produced by Bayfield Company:Direct materials $50Direct labor 35Variable overhead 30Fixed overhead 40Unit cost $155Fixed selling costs are $1,000,000 per year. Although production capacity is 900,000 units per year, Bayfield 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.Requirements:1) Compute the effect on income if Bayfield accepts the special order.2) If Bayfield accepts the special order, how much could normal sales drop before all of the differential profits disappear?

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Answer:

1. Effect on Income = Additional Order*(Purchase Price - (Direct Material + Direct Labor + Variable Overhead))

Effect on Income = 60,000*(150 - (50+35+30))

Effect on Income = 60,000*(150 - 115)

Effect on Income = 60,000 units * $35

Effect on Income = $2,100,000

Net Income would increase by $2,100,000

2. Drop in Sales = Increase in Net Income/(Normal Sales Price - Total Variable Costs)

Drop in Sales = $2,100,000/(180 - 115)

Drop in Sales = $2,100,000/65

Drop in Sales = 32307.69231

Drop in Sales = $32,307.69

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