Gruner Company produces golf discs which it normally sells to retailers for $7.0
ID: 2442812 • Letter: G
Question
Gruner Company produces golf discs which it normally sells to retailers for $7.07 each. The cost of manufacturing 19,300 golf discs is:Materials $10,422
Labor 27,406
Variable overhead 20,651
Fixed overhead 38,986
Total $97,465
Gruner also incurs 5% sales commission ($0.35) on each disc sold.
Travis Corporation offers Gruner $4.95 per disc for 5,400 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 $38,986 to $44,158 due to the purchase of a new imprinting machine. No sales commission will result from the special order.
Explanation / Answer
Present Variable cost Materials $10,422 Labor 27,406 Variable overhead 20,651 Total 58,479 Per unit Variable cost (58,479 ÷ 19,300) $3.03 Selling Price of new order $4.95 Less: Variable cost $3.03 Contribution per unit $1.92 Contribution for 5,400 units 10,368 Less: Additional Fixed cost 5,172 Net operating Income 5,196 Note: Since there is net operating income of $5,196, this order can be accepted.
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