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 20,000 golf discs is:
Materials $10,000 Labor 30,000 Variable overhead 20,000 Fixed overhead 40,000 Total $100,000

Gruden also incurs 5% sales commission ($0.35) on each disc sold.

McGee Corporation offers Gruden $4.80 per disc for 5,000 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 $40,000 to $46,000 due to the purchase of a new imprinting machine. No sales commission will result from the special order.

Explanation / Answer

The company should not accept the order

Particulars Reject Order Accept Order Net Income Increase/(Decrease) Revenues 140000 164000 24000 Materials 10000 12500 -2500 Labor 30000 37500 -7500 Variable Overhead 20000 25000 -5000 Fixed Overhead 40000 60000 -20000 Sales Commission 7000 0 7000 Net Income 33000 29000 -4000

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