Question

Imperial Jewelers manufactures and sells a gold bracelet for $405.00. The company’s accounting system says that the unit product cost for this bracelet is $261.00 as shown below:

Direct materials	$	142
Direct labor		86
Manufacturing overhead		33
Unit product cost	$	261

The members of a wedding party have approached Imperial Jewelers about buying 26 of these gold bracelets for the discounted price of $365.00 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 $454 and that would increase the direct materials cost per bracelet by $11. 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, $12.00 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?

The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow:

	Total			Dirt Bikes			Mountain Bikes			Racing Bikes
Sales	$	918,000		$	261,000		$	401,000		$	256,000
Variable manufacturing and selling expenses		481,000			117,000			206,000			158,000
Contribution margin		437,000			144,000			195,000			98,000
Fixed expenses:
Advertising, traceable		70,200			9,000			40,600			20,600
Depreciation of special equipment		44,200			20,600			7,700			15,900
Salaries of product-line managers		115,200			40,200			38,600			36,400
Allocated common fixed expenses*		183,600			52,200			80,200			51,200
Total fixed expenses		413,200			122,000			167,100			124,100
Net operating income (loss)	$	23,800		$	22,000		$	27,900		$	(26,100)

*Allocated on the basis of sales dollars.

Management is concerned about the continued losses shown by the racing bikes and wants a recommendation as to whether or not the line should be discontinued. The special equipment used to produce racing bikes has no resale value and does not wear out.

Required:

1. What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?

2. Should the production and sale of racing bikes be discontinued?

3. Prepare a properly formatted segmented income statement that would be more useful to management in assessing the long-run profitability of the various product lines.

Answer 1