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Smooth Move Company manufactures professional paperweights and has been approached by a new...

Question:

Smooth Move Company manufactures professional paperweights and has been approached by a new customer with an offer to purchase 15,000 units at a per-unit price of $7.00. The new customer is geographically separated from Smooth Move's other customers, and existing sales will not be affected. Smooth Move normally produces 82,000 units but plans to produce and sell only 65,000 in the coming year. The normal sales price is $12 per unit. Unit cost information is as follows:

Direct materials $3.10
Direct labor 2.25
Variable overhead 1.15
Fixed overhead 1.80
Total $8.30

Special-Order Decision

Refer the information for the Smooth Move Company above. If Smooth Move accepts the order, no fixed manufacturing activities will be affected because there is sufficient excess capacity.

Required

1. What are the alternatives for Smooth Move?

2. Conceptual Connection: Should Smooth Move accept the special order?

3. By how much will profit increase or decrease if the order is accepted?

Special Order Decision:

In a special order decision, all the costs that are considered must be incremental, that is they must increase if the order is accepted. When a company has the capacity to manufacture the special order units, fixed manufacturing costs will usually not increase, so they are irrelevant.

Answer and Explanation:


1. Smooth Move can either accept or reject the special order.


2. The effect on profits from accepting the special order is:

Revenue per unit $7.00
Cost per unit:
Direct materials $3.10
Direct labor 2.25
Variable manufacturing overhead 1.15
Fixed manufacturing overhead
Fixed costs will not increase with the order
0
Unit product cost $6.50
Incremental net operating income or (loss)
per unit
$0.50
Incremental net operating income or (loss)
15,000 units
$7,500


I believe Smooth should accept the order because that will increase profits


3. If the order is accepted, profit will increase by $7,500



Learn more about this topic:

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Identifying Relevant Costs in Accepting an Order

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 8
920

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