Innova 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
Innova also incurs 5% sales commission ($0.35) on each disc sold.
Mudd Corporation offers Innova $4.75 per disc for 5,000 discs. Mudd would sell the discs under its own brand name in foreign markets not yet served by Innova. If Innova accepts the offer, its fixed overhead will increase from $50,000 to $55,000 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 Innova accept the special order? Why or why not?
(c) What assumptions underlie the decision made in part (b)?