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 ........ $3.00
Direct labor ......... 2.25
Variable overhead ....... 1.15
Fixed overhead ......... 1.80
Total ............. $8.20
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. Should Smooth Move accept the special order? By how much will profit increase or decrease if the order is accepted?