Smooth Move Company manufactures professional paperweights and has been approach

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 geographical 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: If smooth move accepts the order, no fixed manufacturing activities will be affected because there is sufficient excess capacity. what are the alternatives for Smooth Move? Conceptual Connection: Should Smooth Move accept the special order? By how much will profit increase or decrease if the order is accepted? Relevant costs are future costs and differ across alternatives Relevant costs tor me special order are me variable costs. Calculate the Contribution Margin for the special order.

Explanation / Answer

Solution-1

The two alternatives are as follows....

Solution-2

So, The relevent manufaturing cost per unit = $6.50

Now, We calculate the Gross Profit per unit from the special order as follows....

Gross Profit (Special Order) = $7.00 – $6.50

Gross Profit (Special Order) = $0.50

Increase in Gross Profit = 15,000*$0.50

Increase in Gross Profit = $7,500

So, The special order is accepted.

Direct materials $3.10 Direct labor $2.25 Variable overhead $1.15 Total $6.50

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