Exercise 13-26 Special-Order Decision Refer to the information for Smooth Move C

Question

Exercise 13-26 Special-Order Decision

Refer to the information for Smooth Move Company above. If Smooth Move accepts the order, no fixed manufacturing activities will be affected because there is sufficient excess capacity.

Required:

1.What are the alternatives for Smooth Move?

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

3.CONCEPTUAL CONNECTION Briefly explain the significance of the statement in the exercise that “existing sales will not be affected” (by the special sale).

Explanation / Answer

1.What are the alternatives for Smooth Move?

Answer :Special order should be accepted.

1. The two alternatives are (1) to accept the special order or (2) to reject the special order.

2. Direct materials $3.00

Direct labor 2.25

Variable overhead 1.15

Total $6.40

Relevant manufacturing costs are $6.40 per unit so the gross profit per unit from the special order is $0.60 ($7.00 – $6.40). The increase in gross profit is $9,000 (15,000 × $0.60). Therefore, the special order should be accepted.

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

In this case, it may be easier to deal with the total costs and revenues of the special order:

Smooth Move should reject the special order because it will reduce income by $5,000.

Revenue ( $7 x 15000) $ 105,000 Less variable costs: Direct materials ($3.00 × 15,000)........................................... $45,000 Direct labor ($2.25 × 15,000).................................................. 33,750 Variable overhead ($1.15 × 15,000) ....................................... 17,250 (96,000) Less labeling Machine.................................................................... (14,000) Loss on special rder............................................................... $ (5,000)

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