Gruden Company produces Golf discs, which it normally sells to retailers for $7
ID: 2537249 • Letter: G
Question
Gruden Company produces Golf discs, which it normally sells to retailers for $7 each. the cost of manufacturing 20,000 golf discs is:
materials 10,000
labour 30,000
varible overhead 20,000
fixed overhead 40,000
total 100,000
Gruden also incurs %5 sales comission (0.35) on each disc sold.
McGee corporation offers Gruden $4.80 per disc for 5000 discs. McGee would seel the discs under is own brnd name in foreign markets not yet serviced by Gruden. If Gruden accpets the offer, its fixed overhead will increase from 40000 to 46000 die to the purchase of a new imprinting machine no sales commission will result from the special order.
a) prepare an incremental analysis for the special order
b) should Gruden accept the special order? why or why not?
c) what assumptions underlie the decision made in part b)?
d)Assume that McGee Corporation will not settle for anything less than 5,000 discs.However, to be able to fulfill this size of order, Gruden would have to forego 500 units of regular priced sales.Given this, what is the minimum price Gruden would need to receive from McGee to be indifferent profit wise (i.e., the same profit for each alternative under consideration)?Should Gruden still accept the special order?
Hint: recall the minimum selling price formula in day 1 that involves incorporating an opportunity cost in special pricing decisions.Perhaps the easiest way to tackle this question is to conduct the calculation on a total cost basis and then divide by 5,000 units to obtain the per unit selling price.
Explanation / Answer
As regards the assumption in part c), it is assumed that Gruden would not sell the discs in foreign market served by Mcgee under its own brand name and thus allowing Mcgee to do the same. However,. Had Gruden wants to start selling the discs in the foreign market under its own brand name, it may find difficulties
Gruden Company Incremental analysis for special order Contribution margin from special order of Mcgee corporation = (4.80-3)*5000 9000 Less : additional fixed cost to be incurred 6000 Net operating income from special order 3000 Yes, as there is positive net operating income from this order Gruden should accept the order Contribution forgone on 500 discs =500*(7-3) 2000 Number of discs of special order 5000 Contribution forgone per disc 0.4 Original price envisaged by Mcgee corporation 4.8 Minimum price gruden would need to receive to be indifferent profit wise 5.2 Alternatively, we can find the above minimum price in the following way Contribution forgone on 500 discs =500*(7-3) 2000 Net operating Income(same profit on special order) 3000 Variable cost of 5000 discs 15000 Additional fixed cost to be incurred 6000 Total costs including opportunity cost 26000 Number of discs of special order 5000 Minimum price gruden would need to receive to be indifferent profit wise 5.2Related Questions
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