Peters 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
Peters also incurs 5% sales commission ($0.35) on each disc sold. Wade Corporation
offers Peters $4.75 per disc for 5,000 discs. Wade would sell the discs under its own brand name in foreign markets not yet served by Peters. If Peters 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.
(a) Prepare an incremental analysis for the special order.
(b) Should Peters accept the special order? Why or why not?
(c) What assumptions underlie the decision made in part (b)?