Question

Imperial Jewelers manufactures and sells a gold bracelet for $409.00. The company’s accounting system says that the unit product cost for this bracelet is $268.00 as shown below:

Direct materials	$	144
Direct labor		88
Manufacturing overhead		36
Unit product cost	$	268

The members of a wedding party have approached Imperial Jewelers about buying 19 of these gold bracelets for the discounted price of $369.00 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 $456 and that would increase the direct materials cost per bracelet by $8. 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, $9.00 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

Statement showing cost per unit of special order by Wedding party

	Per unit $
Direct materials	144
Direct labor	88
Variable Manufacturing overhead	9
Special material	8
Total variable cost per unit	249
Special tool cost for 19 gold bracelets $456

     Selling price offered=$369

So contribution per unit=369-249

                                            =120$

So Financial Advantage on Accepting special order=19*120$-456$

                                        i.e1,824$

2)so special order should be accepted

Note:

• Fixed manufacturing cost is irrelevant for decision making and
• Imperial jewelers has additional capacity to do special order so no need to recover full cost recover only variable cost