Answer:
Required: 1. What are the alternatives for Smooth Move? Accept or reject the special order
Smooth Move should accept the special since operating profits will increase by $2,250
2. CONCEPTUAL CONNECTION: Should Smooth Move accept the special order? By how much will profit increase or decrease if the order is accepted?
operating profits will increase by $2,250
3. CONCEPTUAL CONNECTION: Briefly explain the significance of the statement in the exercise that "existing sales will not be affected" (by the special sale).
The company's productive capacity is 82,000 and since it only plans to sell 65,000, its spare capacity = 82,000 - 65,000 = 17,000.
Also, since the buyer doesn't have any contact with existing customers, it should not resell Smooth's products to the same clients. The normal selling price is $12 per unit, so the new buyer has a $5 margin if it wanted to resell the products.
Explanation:
Since the company's productive capacity is 82,000 units per year, but only 65,000 are scheduled for next year, this special order shouldn't affect budgeted fixed costs.
relevant costs:
- direct labor $2.25
- direct materials $3.10
- variable overhead $1.50
- fixed overhead (not relevant)
- total relevant costs = $6.85
financial advantage of accepting order = additional revenue - relevant costs = $7 - $6.85 = $0.15 per unit x 15,000 units = $2,250
