Homework SourseUse incremental analysis for specialorder decision LO 2 AN G
Use incremental analysis for special-order decision.
(LO 2), AN
Gruden Company produces golf discs which it normally sells to retailers for $7 each. The cost of manufacturing 20,000 golf discs is:
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.
Instructions
(a)
Prepare an incremental analysis for the special order.
| Materials | $ 10,000 |
| Labor | 30,000 |
| Variable overhead | 20,000 |
| Fixed overhead | 40,000 |
| Total | $100,000 |
Solution
McGee order (5000 units)
Incremental order
| particulars | Regular sale (total 20000 discs) | McGee order (5000 units) Incremental order |
| Total Sales | 140000 | 24000 |
| Price per unit = 7 | Price per unit = 4.8 | |
| No of units = 20,000 | No of units = 5,000 | |
| Variable costs | 60000 | 15000 |
| 20000 * 3 | 5000 * 3 | |
| Fixed costs | 40000 | 6000 |
| 46000 - 40000 | ||
| Sales commission | 7000 | |
| 0.35 * 20000 | ||
| Profit | $33,000 | $3,000 |
| Profit/unit | 1.65 | 0.6 |
