Larkin Company produces golf discs which it normally sells to retailers for $6 e
ID: 2376941 • Letter: L
Question
Larkin Company produces golf discs which it normally sells to retailers for $6 each. The cost of manufacturing 25,000 golf discs is:
Materials
$ 10,000
Labor
30,000
Variable overhead
20,000
Fixed overhead
40,000
Total
$100,000
Innova also incurs 5% sales commission ($0.30) on each disc sold.
Rudd Corporation offers Larkin $4.25 per disc for 5,000 discs. Rudd would sell the discs under its own brand name in foreign markets not yet served by Larkin. If Larkin accepts the offer, its fixed overhead will increase from $40,000 to $45,000 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 Larkin accept the special order? Why or why not?
Larkin Company produces golf discs which it normally sells to retailers for $6 each. The cost of manufacturing 25,000 golf discs is:
Materials
$ 10,000
Labor
30,000
Variable overhead
20,000
Fixed overhead
40,000
Total
$100,000
Innova also incurs 5% sales commission ($0.30) on each disc sold.
Rudd Corporation offers Larkin $4.25 per disc for 5,000 discs. Rudd would sell the discs under its own brand name in foreign markets not yet served by Larkin. If Larkin accepts the offer, its fixed overhead will increase from $40,000 to $45,000 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 Larkin accept the special order? Why or why not?
Explanation / Answer
Hi,
Please find the answer as follows:
Incremental Analysis
Part B:
Larkin should accept the special order as it is resulting in an incremental income of 4250
Thanks.
Accept Order Reject Order Differential Sales Revenue 21250 0 21250 Less Material (5000*.40) 2000 0 2000 Labor (5000*1.20) 6000 0 6000 Variable Overhead (5000*.80) 4000 0 4000 Fixed Overhead 5000 0 5000 Sales Commissions 0 0 0 Net Income 4250 0 4250
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