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E7-2 Gruden Company

Price: $1.99


Gruden Company produces golf discs which it normally sells to retailers for $7 each.
The cost of manufacturing 20,000 golf discs is:


Materials   10,000
Labor   30,000
Variable overhead   20,000
Fixed overhead   40,000
Total   100,000

Gruden also incurs 5% sales commission ($0.35) on each disc sold.
McGee Corporation offers Gruden $4.80 per disc for 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 $46,000 due to the purchase
of a new imprinting machine. No sales commission will result from the special order.

Instructions
(a) Prepare an incremental analysis for the special order.
(b) Should Gruden accept the special order? Why or why not?
(c) What assumptions underlie the decision made in part (b)?

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