Question

Gruden Company produces golf discs which it normally sells to retailers for $7 each. The cost of manufacturing 20,000 golf discs is:
Materials $10,000
Labor 30,000
Variable overhead 20,000
Fixed overhead 40,000
Total $100,000

Gruden also incurs 4% sales commission ($0.28) on each disc sold. McGee Corporation offers Gruden $4.80 per disc for 4,800 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 $39,794 to $44,824 due to the purchase of a new imprinting machine. No sales commission will result from the special order.

Prepare an incremental analysis for the special order. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Reject Accept Order Net Income
Order Increase
(Decrease)

Revenues $ $ $
Materials
Labor
Variable overhead
Fixed overhead
Sales commissions
Net income $ $ $

Answer 1

Answer:

INCREMENTAL ANALYSIS

                                                                                Relevant cost

Revenue(4,800*$4.80)                                          $23,040

Materials ( $10,000/20,000)*4,800                     -$2,400

Labor($30,000/20,000)*4800                             -$7,200

Variable overhead(20,000/20,000)*4800          -$4,800

Fixed Costs(39,794 - 44,824)                               -$5,030

Net Income                                                             $3,610

ACCEPT THE ORDER.

Explanation:

Gruden Company should accept the order as it has profit of $3,610

The Relevant cost are only the cost or incremental costs as a results of the order. To Calculate variable costs per unit we used the volume of 20,000 golf disc and its total costs.

Fixed Costs increases as a result of accepting the order which means the difference in fixed costs is an incremental cost.