Gruden Company produces golf discs which it normally sells to retailers for $6.8

Question

Gruden Company produces golf discs which it normally sells to retailers for $6.87 each. The cost of manufacturing 18,500 golf discs is: Materials $9,250 Labor 28,305 Variable overhead 18,500 Fixed overhead 44,800 Total $92,500

Gruden also incurs 6% sales commission ($0.41) on each disc sold. McGee Corporation offers Gruden $5 per disc for 5,800 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 $36,445 to $41,824 due to the purchase of a new imprinting machine. No sales commission will result from the special order.

Explanation / Answer

Answer

Where Material per unit = $9,250/18500 = $0.50

Labor per unit = $ 28,305/18,500 = $1.53

Fixed Overhead = $41,824 - $36,445

b. Should Gruden accept the special order?

Yes, because incremental revenue exceeds the incremental expenses by $6,047

Reject order Accept order Net Income increase(decrease) Revenue 0 $29,000.00 $29,000.00 Materials($0.50) 0     (2,900.00)     (2,900.00) Labor($1.53) 0     (8,874.00)     (8,874.00) Variable Overhead($1) 0     (5,800.00)     (5,800.00) Fixed Overhead 0     (5,379.00)     (5,379.00) Sales Commission 0               -                 -   Net income 0 $ 6,047.00 $ 6,047.00

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