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 $10.00. The new customer is geographically separated from Smooth Move's other customers, and existing sales will not be affected. Smooth Move normally produces 88,000 units but plans to produce and sell only 65,000 in the coming year. The normal sales price is $13 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. By how much will profit increase or decrease if the order is accepted? If your answer is decrease, enter negative value?

Answer 1

Answer:

-$7,500

Explanation:

To determine whether Smooth Move Company to produce 15,000 units for the special order, we consider the relevant cost only, that is the cost of the direct material, the cost of direct labor, the variable overhead and also the incremental costs of the machine along with the cost of the additional direct material cost, if any.

Calculating the incremental revenue from the special order as follows :

Particulars                  Cost per unit(a)      Number of units(b)     Total cost(axb)

Direct material                  3.10                          15,000                     46,500

Direct labor                       2.25                         15,000                     33,750

Cost of labelling machine  0.80                       15,000                     12,000

(12,000/15000)    

Variable overhead             1.15                         15,000                     17,250      

Additional direct materials 0.20                      15,000                     3,000

Incremental cost                 7.50                      15,000                     112,500

Incremental revenue          7.00                      15,000                     105,000

Decrease in profit                                                                            -7,500

The incremental cost is more than the incremental revenue which results in the decrease of the profit with an amount of $7,500.

The order will not be accepted as there is a decrease in the profit for the company.