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 89,000 units but plans to produce and sell only 65,000 in the coming year. The normal sales price is $14 per unit. Unit cost information is as follows: Direct materials $3.10 Direct labor 2.50 Variable overhead 1.15 Fixed overhead 1.80 Total $8.55 Suppose a customer wants to have its company logo affixed to each paperweight using a label. Smooth Move would have to purchase a special logo labeling machine that will cost $12,000. The machine will be able to label the 15,000 units and then it will be scrapped (with no further value). No other fixed overhead activities will be incurred. In addition, each special logo requires additional direct materials of $0.20. Required: CONCEPTUAL CONNECTION: Should Smooth Move accept the special order? By how much will profit increase or decrease if the order is accepted? If your answer is decrease, enter negative value. $

Answer 1

Special order size = 15,000 units

Selling price per unit in the special order = $7

Direct material cost per unit = $3.10

In the special order, Direct material cost per unit will increase by $0.20

Hence, Direct material cost per unit in the special order = 3.10 + 0.20

= $3.30

Direct labor cost per unit = $2.50

variable overhead per unit = $1.15

Cost of special machine = $12,000

Special order evaluation

Sales (15,000 x 7)	105,000
Expenses :
Direct material (15,000 x 3.30)	-49,500
Direct labor (15,000 x 2.50)	-37,500
variable overhead (15,000 x 1.15)	-17,250
Cost of special machine	-12,000
Net loss	-$11,250

Special order should not be accepted.