Question

Pina Company produces golf discs which it normally sells to retailers for $7 each. The cost of manufacturing 19,900 golf discs is:
Materials $ 10,945
Labor 29,651
Variable overhead 21,094
Fixed overhead 39,004
Total $100,694
Pina also incurs 5% sales commission ($0.35) on each disc sold.
McGee Corporation offers Pina $4.77 per disc for 5,350 discs. McGee would sell the discs under its own brand name in foreign markets not yet served by Pina. If Pina accepts the offer, its fixed overhead will increase from $39,004 to $45,374 due to the purchase of a new imprinting machine. No sales commission will result from the special order.
Required:
(a) Prepare an incremental analysis for the special order. (Round answers to 0 decimal places, e.g. 1250. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
(b) Should Pina accept the special order?

Answer 1

Answer:

a) Net income using incremental analysis is   $692

b)   PINA should accept the order because it will increase its net income by $692

Explanation:

The relevant cash flows for decision to accept or reject the special order are

I. the incremental contribution from of producing 5,350 units

2. The incremental fixed cost- 45,374

Note that whether or not the special order is accepted the fixed cost of manufacturing  would be incurred either way.

Contribution per unit =Selling price - Variable cost

Variable production cost per unit = total variable cost / units

                                  = (10,945 + 29651 + 21094)/19,900

                                     =$3.1

Variable cost per unit of sale = $3.1 + $0.35 =  $3.45

a) Incremental Analysis

Change in Net Income:                               $

Incremental contribution :

( 4.77 - 3.45) ×   5,350 =                           7,062

Increase in Fixed cost :

(45,374 - 39,004)                                     (  6370)

Net income                                                 692

b)   PINA should accept the order because it will increase its net income by $692