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

1.

Alternatives for Smooth Move are either to accept the order or to reject the order.

2.
	Alternatives			Differential Benefit to Accept
	Accept	Reject
Price	15,000 x 7 = 105,000	0		105,000
Direct materials	15,000 x 3.10 = - 46,500	0		- 46,500
Direct labor	15,000 x 2.25 = - 33,750	0		- 33,750
Variable overhead	15,000 x 1.15 = - 17,250	0		- 17,250
Increase in operating income	$7,500	0		$7,500

3.

Smooth should accept the special order

4.

Profit will increase by $7,500 if the special order is accepted

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