Gruden Company produces golf discs which it normally sells to retailers for $7 each. The cost of manufacturing 20,100 golf discs is:
Materials $ 10,653 Labor 29,346 Variable overhead 20,100 Fixed overhead 41,205 Total $101,304
Gruden also incurs 4% sales commission ($0.29) on each disc sold.
McGee Corporation offers Gruden $4.94 per disc for 5,020 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 $41,205 to $46,895 due to the purchase of a new imprinting machine. No sales commission will result from the special order.