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Class Participation 9 E7-18: Last Name - First Name - ID

Gruden Company produces golf discs for $7 each, with a total manufacturing cost of $100,000 for 20,000 discs. McGee Corporation offers to buy 5,000 discs for $4.80 each. An incremental analysis shows accepting the offer would increase Gruden's net income by $3,000. Gruden should accept because any profit is better than no profit. Clarington Company makes three phaser models. Its current net income is $65,000. John Liu wants to discontinue the losing Mega-Power model. If done, allocating common fixed costs proportionally, net income would rise to $35,000 from the two remaining models.

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744 views2 pages

Class Participation 9 E7-18: Last Name - First Name - ID

Gruden Company produces golf discs for $7 each, with a total manufacturing cost of $100,000 for 20,000 discs. McGee Corporation offers to buy 5,000 discs for $4.80 each. An incremental analysis shows accepting the offer would increase Gruden's net income by $3,000. Gruden should accept because any profit is better than no profit. Clarington Company makes three phaser models. Its current net income is $65,000. John Liu wants to discontinue the losing Mega-Power model. If done, allocating common fixed costs proportionally, net income would rise to $35,000 from the two remaining models.

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aj singh
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Last name______________________First name _____________________ ID_____________

Class Participation 9

E7-18
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
Labour 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.

Revenue 5,000 X $.4.80 = 24,000


Cost of manufacturing 5,000 X 3 = 15,000
Increased fixed cost = 6,000
Increase in net income 3,000

*** variable cost per unit = (DM+DL+AO/H)/ total # of units


produced = 10,000 + 30,000 + 20,000 / 20,000
= $3

(b) Should Gruden accept the special order? Why or why not?
Yes, I would accept this order because as long as the profit is positive and as long as we are earning
profit why would we not accept this offer.

E7-32
Clarington Company makes three models of phasers. Information on the three products is given below:

Stunner Double-set Mega-power Total (Req. a)


Sales $320,000 $480,000 $200,000  1,000,000
Variable cost 160,000 200,000 130,000  490,000
Contribution margin 160,000 280,000 70,000  510,000
Fixed expense 120,000 225,000 100,000  445,000
Net income 40,000 55,000 (30,000)  65,000

Fixed expenses consist of $300,000 of common costs allocated to the three products based on relative
sales, and additional fixed expenses of $35,000 (Stunner), $70,000 (Double-Set), and $40,000 (Mega-
Power). The common costs will be incurred regardless of how many models are produced. The other
fixed expenses would be eliminated if a model is phased out.

John Liu, an executive with the company, feels the Mega-Power line should be discontinued to increase
the company’s net income.
Instructions
(a) Calculate current net income for Clarington Company. (Answer in the table inserted above)

(b) Calculate net income by product line and in total for Clarington Company if the company
discontinues the Mega- Power product line. (Hint: Allocate the $300,000 common costs to the two
remaining product lines based on their relative sales.)

ADMS 1500_A Summer 17 CP_9


Last name______________________First name _____________________ ID_____________

Stunner Double-set Total


Sales $320,000 $480,000  800,000
Variable cost 160,000 200,000  360,000
Contribution margin 160,000 280,000  440,000
Fixed expense  155,000  250,000  405,000
Net income  5,000  30,000  35,000

Sales percentage: Stunner= 320,000/800,000 = .4

Sales percentage: Double –set = 480,000/800,000 = .6


Fixed cost calculation:
Stunner: Part of the common cost: 300,000 X .4 = 120,000
fixed cost associated with stunner 35,000
155,000

Fixed cost calculation:


Double Set fixed cost associated Part of the common cost: 300,000 X .6 = 180,000
Fixed cost associated with double set 70,000
250,000

ADMS 1500_A Summer 17 CP_9

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