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Gruden Company produces golf discs which it normally sells toretailers for $7.17 each. The cost of manufacturing 24,400 golfdiscs is: Materials $11,468 Labor 37,820 Variable overhead 23,424Fixed overhead 49,288 Total $122,000 Gruden also incurs 5% salescommission ($0.36) on each disc sold. McGee Corporation offersGruden $5 per disc for 5,400 discs. McGee would sell the discsunder its own brand name in foreign markets not yet served byGruden. If Gruden accepts the offer, its fixed overhead willincrease from $49,288 to $54,683 due to the purchase of a newimprinting machine. No sales commission will result from thespecial order. Prepare an incremental analysis for the specialorder.

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Answer:

Prepare an incremental analysis for the special order.

Sales (5,400 discs× $5)                                                   $27,000

Materials ($11,468/24,400×5,400 discs)                         ($2,538)

Labor ($37,820/24,400×5,400 discs)                             ($8,370)

Variable overhead ($23,424/24,400×5,400 discs)        ($5,184)

Incremental Fixed Costs ($54,683-$49,288)                 ($5,395)

Incremental Income/(loss)                                                 $5,513

Explanation:

Consider the Incremental Costs and Revenues arising from accepting the special order.

Note : Consider Incremental Fixed Costs and take note not to include any sales commission.

Prepare an incremental analysis for the special order.

Sales (5,400 discs× $5)                                                   $27,000

Materials ($11,468/24,400×5,400 discs)                         ($2,538)

Labor ($37,820/24,400×5,400 discs)                             ($8,370)

Variable overhead ($23,424/24,400×5,400 discs)        ($5,184)

Incremental Fixed Costs ($54,683-$49,288)                 ($5,395)

Incremental Income/(loss)                                                 $5,513

Therefore an Increase in Profit of $5,513 is expected from accepting the special order.

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