Question

Imperial Jewelers is considering a special order for 17 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $404.00 and its unit product cost is $267.00 as shown below:

Direct materials	$	149
Direct labor		86
Manufacturing overhead		32
Unit product cost	$	267

Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $13 of the overhead is variable with respect to the number of bracelets produced. The customer who is interested in the special bracelet order would like special filigree applied to the bracelets. This filigree would require additional materials costing $12 per bracelet and would also require acquisition of a special tool costing $451 that would have no other use once the special order is completed. This order would have no effect on the company’s regular sales and the order could be fulfilled using the company’s existing capacity without affecting any other order.

Required:

1. What effect would accepting this order have on the company’s net operating income if a special price of $364.00 per bracelet is offered for this order? (Enter all amounts as positive values.)

2. Should the special order be accepted at this price?

	No
	Yes

Answer 1

Statement showing computations
Particulars	Per unit	Total 17 Bracelets
Incremental Revenue	364.00	6,188.00
Incremental Costs:
Variable Costs:
Direct Materials	149.00	2,533.00
Direct Labour	86.00	1,462.00
Variable manufacturing overhead	13.00	221.00
Special filigree	12.00	204.00
Total Variable cost	260.00	4,420.00
Fixed Costs:
Purchase of special tool		451.00
Total Incremental Cost		4,871.00
Incremental net operating income(loss)		1,317.00
Yes since it would result in increase in income by $1,317