Question

Imperial Jewelers is considering a special order for 12 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $407.00 and its unit product cost is $272.00 as shown below:

Direct materials	$	146
Direct labor		86
Manufacturing overhead		40
Unit product cost	$	272

Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $11 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 $10 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 $367.00 per bracelet is offered for this order? (Enter all amounts as positive values.)

2.	Should the special order be accepted at this price?
	Yes No

Answer 1

1.

	Per unit	Total 12 Bracelets (per unit cost*12)
Incremental Revenue	$         407	$                                                                4,884
Incremental Costs
Variable Costs
Direct Material	$         146	$                                                                1,752
Direct Labour	$           86	$                                                                1,032
Variable Manufacturing OH	$           11	$                                                                   132
Special filigree	$           10	$                                                                   120
Total Variable cost	$         253	$                                                                3,036
Fixed Costs
Purchase of Special Tool		$                                                                   451
Total Incremental Cost		$                                                                3,487
Financial Advantage		$                                                                1,397

2. Should accept the order. so they can earn an additional income of $1,397

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