AE7-2 (a,b) Gruner Company produces golf discs which it normally sells to retail

Question

AE7-2 (a,b)
Gruner Company produces golf discs which it normally sells to retailers for $6.88 each. The cost of manufacturing 22,700 golf discs is:

Materials $10,896
Labor 33,369
Variable overhead 21,792
Fixed overhead 45,400
Total $111,457

Gruner also incurs 6% sales commission ($0.41) on each disc sold.

Travis Corporation offers Gruner $4.84 per disc for 5,300 discs. Travis would sell the discs under its own brand name in foreign markets not yet served by Gruner. If Gruner accepts the offer, its fixed overhead will increase from $45,400 to $50,233 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. (If answer is zero, please enter 0. Do not leave any fields blank. If amount decreases the income, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Enter all amounts in columns "Reject Order" and "Accept Order" as positive amounts and subtract where necessary.)



Reject Order Accept Order Net Income Effect
Revenues $ $ $
Materials
Labor
Variable overhead
Fixed Overhead
Sales commission
Net income $ $ $

Should Gruner accept the special order? Yes or no

Explanation / Answer

Incremental revenue (5,300 discs x $4.84)            = $25,652 Less: incremental cost: Direct material ( 0.48 x 5,300)      = 2544 Labor (1.47 x 5,300)                   = 7791
Variable overhead (0.96 x 5,300) = 5088
Fixed overhead                            = 50,233             Net benefit of special order                                  =                              Reject offer                  accept order                    net income effect Revenue           = 156176                     181828                                25,652 Materials $10,896
Labor 33,369
Variable overhead 21,792
Fixed overhead 45,400
sales commission 9,307 Total cost         = 120,764                       141020                              20,256 Net benefit from special order                                                      $ 5,396 Gruner Should accept the special order Gruner Should accept the special order

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