Question

mooth 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 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. How much will profit increase or decrease if the order is accepted?

Answer 1

Net operating loss from the special order $(4500)

Step-by-step explanation:

The accept or reject decision would be evaluated using the following the following cash flows as follows:

$

Sales revenue from the order = ( $7.00 × 15,000) = 105000

Variable cost from the order - (3.10+2.25 + 1.15) × 15,000 (97500)

Cost of label logo machine ( 12,000)

Net operating loss from the the order (4500)

The special order will decrease Smooth Move profit by ($4500)