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

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:
a. Should Smooth Move accept the special order?
b. By how much will profit increase or decrease if the order is accepted? If your answer is decrease, enter negative value.

Answer 1

Answer:

a.  Smooth Move should REJECT the order

b) Net loss from accepting the order $ (7,500)

Explanation:

Relevant costs are future incremental cash costs that arise as a direct consequence of a decision.

The relevant cash flows of this decision include the following:

1. Variable cost of production -(3.10 +2.25 +1.15) + $0.20= $6.7 per unit
2. Cost of additional machine    -   $12,000.
3. Sales revenue from the special offer

                                                                                             $

Sales revenue from special offer (15,000×$7.00) =   105,000

Variable cost (15,000× $6.7)                                        (100,500)

Cost of additional machine    -                                    (12,000)

Net loss from accepting the order                               (7,500)