Question - Gruden Company produces golf discs which it normally sells to retailers for $7 each. The per unit cost of manufacturing 20000 golf discs is:

Direct Materials                - $ 0.50

Direct Labor - 1.50

Variable overhead - 1.00

Fixed overhead - 2.00

Total - $ 5.00

Shank also incurs a 5% sales commission ($0.35 per disc) on each disc sold.

McGee Corporation offers Gruden $4.80 per disc for a special order of 5,000 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 $40,000 to $46000 due to the purchase of a new imprinting machine. There will be no sales commission on the special order. Productive capacity is 30,000 golf discs.

Instructions -

(a) Should Gruden accept the special order? Why or why not?

(b) If productive capacity is only 24,000 golf discs, should Gruden accept the special order? Why or why not? What minimum selling price would have to be charged to have $2000 profit on the special order?

(c) If productive capacity is only 23,000 golf discs, should Gruden accept the special order? Why or why not?