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AccountingManagerial Accounting: The Cornerstone of Business Decision-Making7th Edition

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Chapter 8, Problem 41E
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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Use the following information for Exercises 8-40 and 8-41:

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:

Chapter 8, Problem 41E, Use the following information for Exercises 8-40 and 8-41: Smooth Move Company manufactures

8-41 Special Order

Refer to the information for Smooth Move Company on the previous page. Suppose a customer wants to have its company logo affixed to each paperweight using a label. Smooth Move would have to purchase a special logo labeling machine that will cost $12,000. 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 $0.20.

Required:

CONCEPTUAL CONNECTION Should Smooth Move accept the special order? By how much will profit increase or decrease if the order is accepted?

To determine

Describe whether Company S should accept the special order or not. Also, calculate the increase or decrease in the amount of profit if the order is selected.

Explanation

Special-Order Decision:

The main focus of the special-order decision is to decide whether the specially priced order should be rejected or selected. The special orders may help the firms when they are operating at lower capacity of production.

The following table represents the operating income if the order is accepted:

CostsAmount ($)Special order is accepted ($)
Revenue1 105,000
Less: Variable costs:  
Direct materials249,500 
Direct labor333,750 
Variable overhead417,250100,500
Less: Labeling machine 12,000
Operating income (7,500)

Table (1)

The amount of operating income reduces by $7,500. If the company accepts the order, then the loss will be borne by the company. Therefore, the company should not accept the special order.

Working Notes:

1. Calculation of revenue:

Revenue=Units purchased×Per-unit price=15,000×$7=$105,000

Hence, the amount of revenue is $105,000.

2

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