7-2 Gruden Company produces golf discs which it normally sells to retailers for $7.20 each.
The cost of manufacturing 19,800 golf discs is:
Materials $9,108
Labor 27,918
Variable overhead 20,988
Fixed overhead 39,204
Total $97,218
Gruden also incurs 5% sales commission ($0.36) on each disc sold.
McGee Corporation offers Gruden $5 per disc for 5,400 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 $39,204 to $45,441 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).)
Solution:
(a) Reject Accept
Order Order Net Income Effect
Revenues $ -0- $27,000 $27,000
Materials ($0.46) -0- (2,484) (2,484)
Labor ($1.41) -0- (7,614) (7,614)
Variable overhead ($1.06) -0- (5,724) (5,724)
Fixed overhead -0- (6,237) (6,237)
Sales commissions -0- -0- -0-
Net income $ -0- $ 4,941 $ 4,941
7-5
Schopp Inc. has been manufacturing its own shades for its table lamps. The company is
currently operating at 100% of capacity, and variable manufacturing overhead is charged to
production at the rate of 60% of direct labor cost. The direct materials and direct labor cost
per unit to make the lamp shades are $3.56 and $4.60, respectively. Normal production is
30,700 table lamps per year.
A supplier offers to make the lamp shades at a price of $12.80 per unit. If Schopp Inc. accepts
the supplier’s offer, all variable manufacturing costs will be eliminated, but the $46,380 of
fixed manufacturing overhead currently being charged to the lamp shades will have to be
absorbed by other products.
(a) Prepare the incremental analysis for the decision to make or buy the lamp shades. (Enter
negative amounts using either a negative sign preceding the number e.g. -45 or parentheses
e.g. (45).)
Solution:
Make Buy Net Income increase
(decrease)
Direct materials (30,700 x 3.56) 109,292 0 $109,292
Direct labor (30,700 x 4.60) 141,220 0 $141,220
Variable overhead costs (60% x 84,732 0 $84,732
The cost of manufacturing 19,800 golf discs is:
Materials $9,108
Labor 27,918
Variable overhead 20,988
Fixed overhead 39,204
Total $97,218
Gruden also incurs 5% sales commission ($0.36) on each disc sold.
McGee Corporation offers Gruden $5 per disc for 5,400 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 $39,204 to $45,441 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).)
Solution:
(a) Reject Accept
Order Order Net Income Effect
Revenues $ -0- $27,000 $27,000
Materials ($0.46) -0- (2,484) (2,484)
Labor ($1.41) -0- (7,614) (7,614)
Variable overhead ($1.06) -0- (5,724) (5,724)
Fixed overhead -0- (6,237) (6,237)
Sales commissions -0- -0- -0-
Net income $ -0- $ 4,941 $ 4,941
7-5
Schopp Inc. has been manufacturing its own shades for its table lamps. The company is
currently operating at 100% of capacity, and variable manufacturing overhead is charged to
production at the rate of 60% of direct labor cost. The direct materials and direct labor cost
per unit to make the lamp shades are $3.56 and $4.60, respectively. Normal production is
30,700 table lamps per year.
A supplier offers to make the lamp shades at a price of $12.80 per unit. If Schopp Inc. accepts
the supplier’s offer, all variable manufacturing costs will be eliminated, but the $46,380 of
fixed manufacturing overhead currently being charged to the lamp shades will have to be
absorbed by other products.
(a) Prepare the incremental analysis for the decision to make or buy the lamp shades. (Enter
negative amounts using either a negative sign preceding the number e.g. -45 or parentheses
e.g. (45).)
Solution:
Make Buy Net Income increase
(decrease)
Direct materials (30,700 x 3.56) 109,292 0 $109,292
Direct labor (30,700 x 4.60) 141,220 0 $141,220
Variable overhead costs (60% x 84,732 0 $84,732
