Question

Imperial Jewelers manufactures and sells a gold bracelet for $403.00. The company’s accounting system says that the unit product cost for this bracelet is $269.00 as shown below:

Direct materials	$	150
Direct labor		83
Manufacturing overhead		36
Unit product cost	$	269

The members of a wedding party have approached Imperial Jewelers about buying 29 of these gold bracelets for the discounted price of $363.00 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 $453 and that would increase the direct materials cost per bracelet by $4. 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, $5.00 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

1) Financial advantages:

The company will earn extra income from accepting the special offer since it will be utilising its excess capacity to fulfill the order. In other words the company will be earning from regular order as well as the special order.

Financial Disadvantages:

The company is selling bracelets at a lower prices of $363 with custimisation as compared to regular price of $ 403 per bracelet.

2) The company should accept the offer because it will be earning extra cash from the order.

No Of Bracelets in special order	29
Sales price per Baracelet	$363
Costs Details
Direct Materials	$154
Direct Labour	$83
Variable Manufacturing Overhead	$5
Tools Variable Costs	$242
Fixed Costs- Tool Cost	$453
Sales Income		$10,527
Less: Variable Costs
Direct Materials	$4,466
Direct Labour	$2,407
Variable Manufacturing Overhead	$145
Total Variable Costs		($7,018)
Fixed Costs- Tools cost		($453)
Income		$3,056
The offer should be accepted since the company will earn profits on accepting the offer and using its Excess capacity.Units in normal production incur fixed costs, and fixed costs are excluded from the special order because they’re already covered by the regular sales.