Question

E7.2 (LO 2), AN Gruden Company produces golf discs which it normally sells to retailers for S7 each. The cost of manufacturing 20,000 golf discs is: 

 Materials Labor Variable overhead Fixed overhead Total $ 10,000 30,000 20.000 40,000 $100,000 

Gruden also incurs 5% sales commission ($0.35) on each disc sold. 

McGee Corporation offers Gruden $4.80 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 $40,000 to $46,000 due to the purchase of a new imprinting machine. No sales commission will result from the special order. 

Instructions 

a. Prepare an incremental analysis for the special order. 

b.Should Gruden accept the special order? Why or why not? 

c.What assumptions underlie the decision made in part (b)?

Answer 1

a

Per unit Without Special order With Special order Incremental 20000 25000 5000 $1,40.000 $1.64.000 $24,000 $10,000 Particulars No. of units Sales Less: Variable Cost Material Labor Variable overhead Sales Commission @ 5% Contribution Less: Fixed Costs Profit $30,000 $0.500 $1.50 $1.00 $0.35 $3.65 $2.500 $7,500 $5,000 | $20,000 $7,000 $73,000 -$40.000 S33,000 $12.500 $37,500 $25,000 $7,000 $82,000 - 460001 S36,000 $9,000 -$6,000 $3,000

b. Gruden should accept the special order because there is a net increase in the profit

c. The assumption underlie the decision is part b is that the order is an one time order and not repititive in nature.