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

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.

SO IF WE SELL 22,700 GOLF DISCS, WE MAKE

(27,700) x (6.88 + .41) = (27,700) x (7.37) = $204,147

OUR PROFIT = $204,147 - $111, 457 = $92, 690 is our CURRENT PROFIT

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.

Materials $10,896
Labor 33,369
Variable overhead 21,792
Fixed overhead 45,400 50, 233

Total $111,457 $116, 290

SO IF WE SELL 22, 700 GOLF DISCS UNDER THIS NEW ARRANGEMENT, WE MAKE

(27, 700) x 6.88 = $190,576 is our "new income"

$190,576 - $116,290 = $74,286 is our "NEW PROFIT"

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 see above
Materials same
Labor same
Variable overhead same
Fixed Overhead inceases (see above)
Sales commission $0.41 for the initial; $0.00 for our "new offer"
Net income $ $ $ labeled above as "current profit" and "new profit"

Should Gruner accept the special order? Yes or no

WE SHOULD NOT ACCEPT THE OFFER BECAUSE WE WILL LOSE PROFIT (in the form of lost earnings and increased costs).

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