Smith company produces golf discs which it normally sells to retailers for $7 each. The cost of manufacturing 15,400 golf discs is: Materials Labor "Varlable overhead Fixed overhead Total $8.162 22,792 16,632 31.570 $79.156 Smith also incurs 7% sales commission ($0.49) on each disc sold McGee Corporation offers Cullumber $5.00 per disc for 5.700 discs. McGee would sell the discs under its own brand name in foreign markets not yet served by Cullumber. If Cullumber accepts the offer, it will incur a one-time fixed cost of $5,100 due to the rental of an imprinting machine. No sales commission will result from the Assume there is sufficient capacity to accommodate the special order. =) ial order. (Enter negative amounts 5 or parentheses (451)
Smith company produces golf discs which it normally sells to retailers for $7 each. The cost of manufacturing 15,400 golf discs is: Materials Labor "Varlable overhead Fixed overhead Total $8.162 22,792 16,632 31.570 $79.156 Smith also incurs 7% sales commission ($0.49) on each disc sold McGee Corporation offers Cullumber $5.00 per disc for 5.700 discs. McGee would sell the discs under its own brand name in foreign markets not yet served by Cullumber. If Cullumber accepts the offer, it will incur a one-time fixed cost of $5,100 due to the rental of an imprinting machine. No sales commission will result from the Assume there is sufficient capacity to accommodate the special order. =) ial order. (Enter negative amounts 5 or parentheses (451)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Also, Should Smith accept the special order?
Transcribed Image Text:### Incremental Analysis of Special Order for Smith Company
**Background:**
Smith Company produces golf discs normally sold to retailers for $7 each. The total cost for manufacturing 15,400 golf discs is broken down as follows:
- **Materials:** $8,162
- **Labor:** $22,792
- **Variable overhead:** $16,632
- **Fixed overhead:** $31,570
**Total Manufacturing Cost:** $79,156
Smith also incurs a 7% sales commission ($0.49) on each disc.
**Special Order Scenario:**
McGee Corporation offers to purchase 5,700 discs at $5.00 each. If Smith accepts this offer under its own brand for foreign markets, a one-time fixed cost of $5,100 for an imprinting machine rental will occur. No sales commission applies to this special order.
**Task:**
Conduct an incremental analysis to assess the financial impact of accepting the special order.
#### Incremental Analysis Table
| | Reject Order | Accept Order | Net Income Increase (Decrease) |
|--------------------|--------------|--------------|--------------------------------|
| **Revenues** | | $28,500 | $28,500 |
| **Materials** | | $(3,021) | $(3,021) |
| **Labor** | | $(8,430) | $(8,430) |
| **Variable Overhead** | | $(6,156) | $(6,156) |
| **Cost of Equipment Rental** | | | $(5,100) |
| **Net Income** | | | $5,793 |
### Explanation:
- **Revenues:** Accepting the order generates $28,500 from 5,700 discs at $5 each.
- **Costs:**
- Materials, labor, and variable overhead are calculated based on the number of discs for the special order.
- Equipment rental adds an additional fixed cost.
- **Net Income Effect:** The incremental analysis shows a net income increase of $5,793 if the special order is accepted. This finding helps in decision-making about the financial benefits of the special order.
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