Question

Imperial Jewelers manufactures and sells a gold bracelet for $407.00. The company’s accounting system says that the unit product cost for this bracelet is $259.00 as shown below:

Direct materials	$	147
Direct labor		80
Manufacturing overhead		32
Unit product cost	$	259

The members of a wedding party have approached Imperial Jewelers about buying 17 of these gold bracelets for the discounted price of $367.00 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 $451 and that would increase the direct materials cost per bracelet by $5. 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, $6.00 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 of Special order

	Amount (In $)
Sales (17 bracelets X $ 367 per bracelet)	6,239
Less: Relevant Costs
Direct Materials (17 bracelets X $ 152 per bracelet)	2,584
Direct Labor (17 bracelets X $ 80 per bracelet)	1,360
Variable manufacturing overheads (17 bracelets X $ 6 per bracelet)	102
Purchase cost of Special Filigree	451
Net Income	1,742

If the special order is accepted, the company will have financial advantage of $ 1,742.

Note: Unavoidable fixed manufacturing cost $ 27 per unit (i.e. $ 32 per unit - $ 5 per unit) is a sunk cost (being committed costs) and thus have not been considered in above analysis.

Working Note:

Calculation of revised direct material cost

Revised material cost = $ 147 + $ 5

                                         = $ 152

Answer 2)

Since the order provides financial advantage of $ 1,742, it should be accepted.