Question

Exercise 7.18 are Gruden Company produces golf discs, which it normally sells to retailers for $11 each. The cost of manufacturing 20,000 golf discs is: Materials Labour Variable overhead Fixed overhead Total $12,000 28,000 20,000 45,000 $105,000 Study Gruden also incurs 5% sales commission (50.55) on each disc sold. McGee Corporation offers Gruden $6.00 per disc for 5,000 discs. McGee would sell the discs under its own brand name in foreign markets not yet served by Gruden, if Gruden accepts the offer, its fixed overhead will increase from $45,000 to $51,100 due to the purchase of a new imprinting machine. No sales commission will result from the special order. Prepare an incremental analysis for the special order (Round per unit calculations to 2 decimal places, eg: 15.25 and Final answers to decimal places... 5,275.) Incremental contribution margin Incremental cost: Fioved cost Incremental income Should Gruden accept the special order? Why or why not? the special order, as it will their net income by $ Gruden should What assumption underlies the decision made in part (b)? The assumption underlying the decision is that current sales be affected if Gruden accepts the offer.

Answer 1

a
Incremental contribution margin	29000
Less: Incremental cost
Fixed cost	6100
Incremental income	22900

b

Gruden should accept the special order, as it will increase their net income by $22900

c

The assumption underlying the decision is that current sales would not be affected if Gruden accepts the offer

Workings:
	Per unit	5000 units
Revenues	8.80	44000
Variable costs:
Materials	0.60	3000
Labor	1.40	7000
Variable overhead	1.00	5000
Total Variable costs		15000
Contribution margin		29000
Fixed overhead	6100	=51100-45000