Question

Imperial Jewelers manufactures and sells a gold bracelet for $401.00. The company’s accounting system says that the unit product cost for this bracelet is $278.00 as shown below:

Direct materials	$	150
Direct labor		89
Manufacturing overhead		39
Unit product cost	$	278

The members of a wedding party have approached Imperial Jewelers about buying 14 of these gold bracelets for the discounted price of $361.00 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 $458 and that would increase the direct materials cost per bracelet by $12. 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, $13.00 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

Answer 1)

Statement of Cost Benefit

	Amount (In $)
Sales (14 bracelets X $ 361 per bracelet)	5,054
Total (A)
Relevant Costs of Manufacturing Bracelets:
Direct Materials (14 bracelets X $ 162 per bracelet)	2,268
Direct Labor (14 bracelets X $ 89 per bracelet)	1,246
Variable Manufacturing overheads (14 bracelets X $ 13 per bracelet)	182
Purchase price of special tool	458
Total Relevant costs (B)	4,154
Net Income (A) - (B)	900

From the perusal of above statement it is evident that if the special order is accepted, Imperial Jewelers will have additional Net Income of $ 900. Thus the financial advantage of accepting the special order is $ 900.

Note:

Applicable Direct Material cost = $ 150 per bracelet + $ 12 per bracelet

                                                          = $ 162 per bracelet.

· Fixed manufacturing cost is not a relevant cost being unavoidable in nature. Also since there is no additional fixed cost due to acceptance of special order, no part of fixed cost has been charged from the special order.

Answer 2)

Yes, the company should accept the special order as it will provide additional net income of $ 900.