Springfield Company produces golf discs which it normally sells to retailers for

Question

Springfield Company produces golf discs which it normally sells to retailers for $6 each. The cost of manufacturing 25,000 golf discs is: Materials $ 10,000 Labor 30,000 Variable overhead 20,000 Fixed overhead 40,000 Total $ 100,000 Springfield also incurs 5% sales commission ($0.30) on each disc sold. Lundy Corporation offers Springfield $5.25 per disc for 5,000 discs. Lundy would sell the discs under its own brand name in foreign markets not yet served by Springfield. If Springfield accepts the offer, its fixed overhead will increase from $40,000 to $45,000 due to the purchase of a new imprinting machine. No sales commission will result from the special order.

Prepare an incremental analysis for the special order.

Explanation / Answer

SOLUTION

Reject order ($) Accept Order ($) Net Income effect ($) Revenues (5,000 * $5.25) 0 26,250 26,250 Materials ($0.40) 0 (2,000) (2,000) Labor ($1.20) 0 (6,000) (6,000) Variable overhead ($0.80) 0 (4,000) (4,000) Fixed overhead 0 (5,000) (5,000) Sales commissions 0 0 0 Net income 0 9,250 9,250

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