Questions: Special-Order Decision The Cool Can Company manufactures drink kiosies and has been approached by a new customer with an offer to purchase 15,000 units at a per-unit price of 9.00. The new customer is geographically separated from Cool Can's other customers, and existing sales will not be affected. Cool Can normally produces 85,000 units but plans to produce and sell only 65,000 in the coming year. The normal sales price is 16 per unit. Unit cost information is as follows: Direct materials 3.10 Direct labor 2.75 Variable overhead 1.00 Fixed overhead 1.80 Total 8.65 If Cool Can accepts the order, no fixed manufacturing activities will be affected because there is sufficient excess capacity. 1. What are the alternatives for Cool Can? 2. Conceptual Connection: Should Cool Can accept the special order? By how much will operating income 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).

Let's address the questions one by one:

Cool Can has two primary alternatives:

• Accept the special order: Produce and sell 15,000 units to the new customer at a price of $9.00 per unit.
• Reject the special order: Do not produce the additional 15,000 units and continue with the planned production and sales of 65,000 units.

To determine whether Cool Can should accept the special order, we need to analyze the impact on operating income.

• Incremental Revenue: \[ 15,000 \text{ units} \times \$9.00 \text{ per unit} = \$135,000 \]

• Incremental Costs: Since fixed overhead costs will not change and there is sufficient excess capacity, we only consider variable costs (Direct materials, Direct labor, and Variable overhead): \[ \text{Variable cost per unit} = \$3.10 + \$2.75 + \$1.00 = \$6.85 \] \[ \text{Total variable costs} = 15,000 \text{ units} \times \$6.85 \text{ per unit} = \$102,750 \]

• Incremental Operating Income: \[ \text{Incremental Revenue} - \text{Incremental Costs} = \$135,000 - \$102,750 = \$32,250 \]

Therefore, if Cool Can accepts the special order, the operating income will increase by $32,250.

The statement "existing sales will not be affected" is significant because it implies that the special order will not cannibalize or reduce the sales of the existing products. This means that the company can take on the special order without losing any revenue from its current customers. Additionally, it indicates that the company has sufficient excess capacity to fulfill the special order without impacting its regular production schedule. This is crucial for the decision-making process because it ensures that the additional revenue from the special order is truly incremental and does not come at the expense of existing sales or require additional fixed costs.