Gruden Company produces golf discs which it normally sells to retailers for $10
ID: 2901779 • Letter: G
Question
Gruden Company produces golf discs which it normally sells to retailers for $10 each. The cost of manufacturing 12,300 golf discs is:
Materials
$ 7,380
Labor
8,610
Variable overhead
15,990
Fixed overhead
30,750
Total
$62,730
Gruden also incurs 5% sales commission ($0.50) on each disc sold.
McGee Corporation offers Shank $6 per disc for 5,600 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 $30,750 to $36,900 due to the purchase of a new imprinting machine. No sales commission will result from the special order.
(a)
Prepare an incremental analysis for the special order.
Reject
Order
Accept
Order
Net Income
Increase
(Decrease)
Revenues
$
$
$
Materials
Labor
Variable overhead
Fixed overhead
Sales commissions
Net income
$
$
$
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Sell
Process
Further
Net Income
Increase
(Decrease)
Gruden Company produces golf discs which it normally sells to retailers for $10 each. The cost of manufacturing 12,300 golf discs is:
Materials
$ 7,380
Labor
8,610
Variable overhead
15,990
Fixed overhead
30,750
Total
$62,730
Gruden also incurs 5% sales commission ($0.50) on each disc sold.
McGee Corporation offers Shank $6 per disc for 5,600 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 $30,750 to $36,900 due to the purchase of a new imprinting machine. No sales commission will result from the special order.
Explanation / Answer
Reject order
Accept order
Net income
Revenues
123,000
156,600
33,600
Materials
7,380
10,740
3,360
Labor
8,610
12,530
3,920
Variable overhead
15,990
23,270
7,280
Fixed overhead
30,750
36,900
6,150
Sales commission
6,150
6,150
--
Net income
54,120
67,010
12,890
McGee
McGee Corporation would be in a better position that can be seen from the table above . It will earn a cool 12,890 over the current income if it decides to supply those 5600 discs .
When accepting the order total of 17,900 (12,300+5,600) units will have to be supplied and there costs are calculated as follows .
In either case McGee would be incurring a fixed cost given. The variable costs namely materials , labor, Variable overheads would increase with increase in production .
Material total costs = $7380 for ever 12,300 units . Variable cost per unit is 7380/12300 , that is $0.6 per unit . Similarly labor is $0.7 per unit and variable overheads are $1.3 per unit .
LOH GEAR
sell
Process Further
Net income
Sales per unit
360
480
120
Cost per unit
Materials
175
180
5
Labor
70
80
10
Variable overhead
49
56
7
Fixed overhead
21
21
-
Total
315
337
22
Net income per unit
45
143
98
Processing further will result in additional income of $98 per bike . Materials increase by $5$10 only and the labor will increase by to $80 . Variable overheads are 70% of the labor and will increase proportionally. Since Fixed overheads remain fixed they will remain constant at 21 . Assembling will result in an additional income of $98 and Loh gear should go for it .
Reject order
Accept order
Net income
Revenues
123,000
156,600
33,600
Materials
7,380
10,740
3,360
Labor
8,610
12,530
3,920
Variable overhead
15,990
23,270
7,280
Fixed overhead
30,750
36,900
6,150
Sales commission
6,150
6,150
--
Net income
54,120
67,010
12,890
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