Question

Special-Order Decision

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 $9.00. The new customer is geographically separated from Smooth Move's other customers, and existing sales will not be affected. Smooth Move normally produces 95,000 units but plans to produce and sell only 65,000 in the coming year. The normal sales price is $15 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

If Smooth Move accepts the order, no fixed manufacturing activities will be affected because there is sufficient excess capacity.

Required:

1. What are the alternatives for Smooth Move?
Accept or reject the special order

2. CONCEPTUAL CONNECTION: Should Smooth Move accept the special order?
Yes

By how much will profit increase or decrease if the order is accepted?
Increase  $

3. CONCEPTUAL CONNECTION: Briefly explain the significance of the statement in the exercise that “existing sales will not be affected” (by the special sale).

It indicates that there will be no product-line cannibalization; in other words, there is sufficient excess capacity such that the acceptance of the special sales will not decrease Smooth Move’s regular sales.

Answer 1

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