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

1. What are the alternatives for Smooth Move?

2. Compare the relevant costs of the alternatives.
	Alternatives			Differential Benefit to Accept
	Accept	Reject
Price
Direct materials
Direct labor
Variable overhead
Increase in operating income

3. Should Smooth accept the special order?

4. Will profit increase or decrease, and by how much, if the special order is accepted?

Answer 1

while decision making to accept or reject order only relevant costs should be considered.

Here, the acceptance of special order will not affect the regular sales as the company have excess capacity ,so fixed overhead is not relevant cost as it will remain constant and will not increase with acceptance of order.

relevant costs here are material labor and variable overhead as they will increase with increase in special order.

1.smooth move have two alternatives, (1) accept the special order (2) reject the order

2.

Compare the relevant costs of the alternatives.
	Alternatives			Differential Benefit to Accept
	Accept	Reject
Price	$105,000[$7*15000 units]	0		$105,000
Direct materials	($46,500)[$3.10*15000]	0		($46,500)
Direct labor	($33,750)[$2.25*15000]	0		($33,750)
Variable overhead	($17,250)[$1.15*15000]			($17,250)
Increase in operating income	$7,500	0		$7,500

3. Yes the order should be accepted as there is increase in net income

4. Net income will increase by $7500 if the3.1 special order is accepted.