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 23,600 golf discs is: Materials $ 12,744 Labor 36,344 Variable overhead 24,308 Fixed overhead 48,144 Total $121,540 Gruden also incurs 7% sales commission ($0.49) on each disc sold. McGee Corporation offers Gruden $4.88 per disc for 5,140 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 $48,144 to $52,714 due to the purchase of a new imprinting machine. No sales commission will result from the special order.

Explanation / Answer

Contribution with seling commission=$7-$3.6=$3.4

Contribution without seling commission=$7-$3.11=$3.89

Increase in fixed cost if Gruden accepts the offer=$52,714-$48,144=$4,570

Net income/loss if Gruden accepts the offer=$3.89*5,140-$4,570=$19,994.6-$4,570=$15,424.6

Particulars Amount Per unit No of units prodused 23,600.00 Direct Material            12,744             0.54 Labour cost            36,344             1.54 Variable overhead            24,308             1.03 Total Variable cost            73,396             3.11 Variable sales commisiion            11,564             0.49 Total Variable cost After Sales commisiion            84,960             3.60 Fixed cost            48,144 2.04 Total Cost        1,33,104 5.64

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