Reference no: EM132711093

Watauga Inc. has a idle capacity. Recently Watauga received an offer to sell 2,000 units of one of its products to a new customer in a geographic region not normally serviced. The offering price is $10 per unit. The product normally sells for $14.

The activity-based accounting systems provides the following information:

• Quantity demanded represents only the amount of resources demanded by the special order being considered.
• Fixed Activity Rate is the price that must be paid per unit of activity capacity; Variable Activity Rate is the price per unit of resource for resources acquired as needed.
• Although the fixed activity rate for setups is $50 per hour, any expansion of this resource must be acquired in blocks. The unit of purchase for setups is 100 hours of setup servicing. Thus, any expansion of setup activity must be done 100 hours at a time. The price per hour is the fixed activity rate.

Problem 1: Should the order be accepted? What is the change in income?

Problem 2: What if? the setup activity had 50 hours of unused capacity. How does this affect your analysis?