Exercise 1 - Gruden Company produces golf discs which it normally sells to retailers for $6.95 each. The cost of manufacturing 22,700 golf discs is:
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Materials
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$11,123
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Labor
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33,142
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Variable overhead
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24,289
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Fixed overhead
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45,400
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Total
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$113,954
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Gruden also incurs 5% sales commission ($0.35) on each disc sold.
McGee Corporation offers Gruden $5 per disc for 5,600 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 $45,400 to $50,228 due to the purchase of a new imprinting machine. No sales commission will result from the special order.
(a) Prepare an incremental analysis for the special order.
Exercise 2 - 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 $3.90 and $5.00, respectively. Normal production is 28,000 table lamps per year.
A supplier offers to make the lamp shades at a price of $13.30 per unit. If Schopp Inc. accepts the supplier's offer, all variable manufacturing costs will be eliminated, but the $46,630 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.
Exercise 3 - ShurShot Sports Inc. manufactures basketballs for the National Basketball Association (NBA). For the first 6 months of 2014, the company reported the following operating results while operating at 80% of plant capacity and producing 118,900 units.
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Amount
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Sales
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$4,756,000
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Cost of goods sold
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3,762,684
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Selling and administrative expenses
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370,968
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Net income
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$622,348
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Fixed costs for the period were cost of goods sold $1,080,300, and selling and administrative expenses $185,484.
In July, normally a slack manufacturing month, ShurShot Sports receives a special order for 10,200 basketballs at $27 each from the Greek Basketball Association (GBA). Acceptance of the order would increase variable selling and administrative expenses $0.49 per unit because of shipping costs but would not increase fixed costs and expenses.
Prepare an incremental analysis for the special order.