E21-2 Gruden Company produces golf discs which it normally sells to retailers fo
ID: 2584446 • Letter: E
Question
E21-2 Gruden Company produces golf discs which it normally sells to retailers for $7 each. The cost of manufacturing 20,000 golf discs is: Materials Labor Variable overhead Fixed overhead Total 10,000 30,000 20,000 40,000 $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 Grudern 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 orderExplanation / Answer
a) Selling Price for Special Order $4.8
Variable Cost per Golf Disc :
Materials ($ 10,000/20,000 Units) $0.5
Labor ($30,000/20,000 Units) $1.5
Variable overhead($20,000/20,000 Units) $1.0
___________
Total Variable Cost per Unit $3.0
Contribution per Unit = Selling Price per unit - Total Variable Cost per Unit
= $ 4.8-$3.0= $1.8
Contribution for 5,000 Units= 5,000*1.8= $9,000
Less: Incemental Fixed Overhead($46,000-$40,000)= $6,000
________
Profit $3,000
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b) Gruden should accept the special order because it results $3,000 extra profit
c) Increae in Fixed overhead can cover the additional contribution of $ 9,000.
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