Question

Imperial Jewelers manufactures and sells a gold bracelet for $406.00. The company’s accounting system says that the unit product cost for this bracelet is $265.00 as shown below:

Direct materials $ 144

Direct labor 81

Manufacturing overhead 40

Unit product cost $ 265

The members of a wedding party have approached Imperial Jewelers about buying 20 of these gold bracelets for the discounted price of $366.00 each. The members of the wedding party would like special filigree applied to the bracelets that would require Imperial Jewelers to buy a special tool for $464 and that would increase the direct materials cost per bracelet by $13. The special tool would have no other use once the special order is completed.

To analyze this special order opportunity, Imperial Jewelers has determined that most of its manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $14.00 of the overhead is variable with respect to the number of bracelets produced. The company also believes that accepting this order would have no effect on its ability to produce and sell jewelry to other customers. Furthermore, the company could fulfill the wedding party’s order using its existing manufacturing capacity.

Required: 1. What is the financial advantage (disadvantage) of accepting the special order from the wedding party? 2. Should the company accept the special order?

Answer 1

For taking the decesion we should only consider the incremental costs and benefits are relevant. In particular, only the variable manufacturing overhead and the cost of the special tool are relevant overhead costs in this situation.

The other manufacturing overhead costs are fixed and are not affected by the decision

	Per unit	Total for 20 Bracelets
Incremental revenue	366	7320
Less: Incremental costs
Variable costs:
Direct Material	144	2880
Direct Labor	81	1620
Variable manufacturing overhead	14	280
Special filigree	13	260
Total variable cost	252	5040
Fixed cost
Purchase of special tool		464
Total incremental cost		5504
Financial advantage of accepting the special order		1816

2

Should the company accept the special order?

Answer: Yes

Explanation:

As we can see that Financial advantage of accepting the special order is $1816 positive so for company would be better off accepting the order