Why not? KId just wants to give SM a parental title, dad sees no big deal, says it isn't disrespectful to give his wife one, so why not give her his instead of moms? He isn't mom so it isn't title to give away, but dad is.
So, if the kid loves SM so very much and she is just doing all this work for the kid that dad should be doing but isn't and the kid wants to show how much they love the woman with a title, why don't SM and dad encourage the kid calling her dad?
After all, it's just a word and it means absolutely nothing so it shouldn't matter that she is called dad, right?