Gruden Company produces golf discs which it normally sells to retailers for $7 e

Question

Gruden Company produces golf discs which it normally sells to retailers for $7 each. The cost of manufacturing 17,000 golf discs is:

Gruden also incurs 6% sales commission ($0.42) on each disc sold.

McGee Corporation offers Gruden $4.95 per disc for 5,570 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 $34,340 to $38,930 due to the purchase of a new imprinting machine. No sales commission will result from the special order.

Should Gruden accept the special order?

Materials $  9,180 Labor 24,990 Variable overhead 17,850 Fixed overhead 34,340 Total $86,360

Explanation / Answer

Prepare an incremental analysis:

As net incoem increase after accepting special order, it is recommended to accept the order.

Details Reject
order Accept
order Net income
Increase
(decrease) Revenues (17000*7) $ 119,000.00 $ 27,571.50 $   146,571.50 Materials $    (9,180.00) $ (3,007.80) $   (12,187.80) Labor $ (24,990.00) $ (8,187.90) $   (33,177.90) variable overhead $ (17,850.00) $ (5,848.50) $   (23,698.50) Fixed overhead $ (34,340.00) $ (4,590.00) $   (38,930.00) sales commission $    (7,140.00) $                 -   $     (7,140.00) Net income $    25,500.00 $    5,937.30 $     31,437.30

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