Special$-$Order Decision

The Cool Can Company manufactures drink koozies and has been approached by a new customer with an offer to purchase $15,000$ units at a per$-$unit price of $$7\mathrm{.}00.$ The new customer is geographically separated from Cool Can's other customers, and existing sales will not be affected. Cool Can normally produces $82,000$ units but plans to produce and sell only $65,000$ in the coming year. The normal sales price is $$12$ per unit. Unit cost information is as follows:

Line Item Description Cost

Direct materials $$3\mathrm{.}10$

Direct labor $1\mathrm{.}50$

Variable overhead $1\mathrm{.}00$

Fixed overhead $1\mathrm{.}80$

Total $$7\mathrm{.}40$

If Cool Can accepts the order, no fixed manufacturing activities will be affected because there is sufficient excess capacity.

Required:

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$1.$ What are the alternatives for Cool Can?

Accept or reject the special order

$2.$ Conceptual Connection: Should Cool Can accept the special order?

Yes

By how much will operating income increase or decrease if the order is accepted?

Increase

fill in the blank $1$ of $1$$

$3.$ Conceptual Connection: Briefly explain the significance of the statement in the exercise that "existing sales will not be affected" $($by the special sale$).$

It indicates that there will be no product$-$line cannibalization; in other words, there is sufficient excess capacity such that the acceptance of the special sales will not decrease Cool Can's regular sales.