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 $268.00 as shown below:

Direct materials	$	141
Direct labor		89
Manufacturing overhead		38
Unit product cost	$	268

The members of a wedding party have approached Imperial Jewelers about buying 24 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 $455 and that would increase the direct materials cost per bracelet by $10. 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, $11.00 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

The fixed cost is sunk cost since it will have to be incurred whether the special order is accepted or not. Hence, it is irrelevant for decision-making.

Further, the ability of the company to produce and sell jewellery to other customers would not be affected and the company could fulfil the wedding party’s order using its existing manufacturing capacity, hence we can say the company is not losing any contribution that it could earn from external customers.

1. Computation of financial advantage upon accepting the special order from the wedding party

Particulars

Amount in $

Revenue due to the order (24 bracelets @ $363)

8,712

Less: Direct materials cost (24 bracelets @ $151)

3,624

Less: Direct labor cost (24 bracelets @ $89)

2,136

Less: Variable manufactuing overhead (24 bracelets @ $11)

264

Less: Cost of special tool incurred for the order

455

Financial advantage due to the special order

2,233

2. Since the special order is resulting in a financial advantage of $2,233 for the company, it should accept the order.