1. Gruden Company produces golf discs which it normally sells to retailers for $

Question

1. Gruden Company produces golf discs which it normally sells to retailers for $6.91 each. The cost of manufacturing 24,500 golf discs is: Materials Labor Variable overhead 24,990 Fixed overhead Total $12,740 38,710 48,020 $124,460 McGee Corporation offers Gruden $5 per disc for 5,700 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 $48,020 to $54,509 due to the purchase of a new imprinting machine What effect will acceptance of the special order have on net income?

Explanation / Answer

Current total variable costs

= ($12,740 + $38,710 + $24,990)

= $76,440

Variable cost per unit

= Total variable costs / Number of units

= $76,440 / 24,500

= $3.12 Per unit

Relevant fixed costs are increase in fixed costs due to new order as fixed costs already incurred are sunk costs which are not relevant for decision making

So, Relevant fixed costs

= $54,509 - $48,020

= $6,489

Relevant fixed costs per unit

= Relevant fixed costs / Units sold in special order

= $6,489 / 5,700

= $1.14 per unit

So, Total cost per unit under special order

= Variable cost per unit + Fixed costs per unit

= $3.12 + $1.14

= $4.26 per unit

So, Increase in net income

= (Selling price of special offer – Costs of special offer) x Units sold under special offer

= ($5.00 - $4.26) x 5,700

= $ 4,218

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