Exercise 7-2 Gruden Com pany produces golf discs which it normally sells to reta

Question

Exercise 7-2 Gruden Com pany produces golf discs which it normally sells to retailers for $7 each. The cost of manufacturing 23,600 golf discs is: Materials Labor Variable overhead Fixed overhead Total 12,744 36,344 24,308 48,144 $121,540 Gruden also incurs 7% sales commission ($0.49) on each disc sold. McGee Corporation offers Gruden $4.88 per disc for 5,140 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 $48,144 to $52,714 due to the purchase of a new imprinting machine. No sales commission will result from the special order.

Explanation / Answer

a)Differential Analysis Reject Order (Alternative-1) or Accpt Order ( Alternative-2) Particular Alternative-1 ( Reject Order) Alternativ-2 (Accept Order) Net Income Effect Revenue   ($4,88*5140) 0 $25,083 $25,083 Direct Material (12744/23600*5140) 0 -$2,776 -$2,776 Direct Labour(36344/23600*5140) 0 -$7,916 -$7,916 Variable Factory OH(24308/23600*5140)0   0 -$5,294 -$5,294 Fixed Overhead 0 -$4,570 -$4,570 Sales Comission 0 $0 $0 Income/(Loss) 0 $4,528 $4,528 b) Differntial effect on income is $4528, hence the company should accept the proposal

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