In: Accounting
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 R70. 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 65 000
in the coming year. The normal sales price is R120 per unit. Unit
cost information is as follows:
Direct materials - R31;
Direct labour - R22.50;
Variable overhead - R11.50 &
Fixed overhead - R18.
Suppose the customer wants to have its company logo
affixed to each paperweight using a label. Smooth Move would have
to purchase a special logo labelling machine that will cost R120
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 R2.
Required:
a. Should Smooth Move accept the order? Show
calculations.
b. By how much will profit increase or decrease if the
order is accepted?
Answer a. Should Smooth Move accept the order : No
Explanation: Financial advantage (disadvantage) of accepting the special order
Selling price per unit | R70 |
Less: Direct materials per unit | (31) |
Less: Direct labor per unit | (22.50) |
Less: Variable overhead per unit | (11.50) |
Less: additional direct materials per unit | (2) |
3.00 | |
* Number of units | * 15,000 units |
45,000 | |
Less: special logo labelling machine | (120,000) |
Financial disadvantage | R(75,000) |
Since accepting the special order will result in financial disadvantage, Smooth Move should not accept the order
Answer b. By how much will profit increase or decrease if the order is accepted:
Decrease by R(75,000)