Question

Exercise 12-4 Evaluating a Special Order [LO12-4]

Imperial Jewelers is considering a special order for 25 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $406.00 and its unit product cost is $264.00 as shown below:

Direct materials	$	147
Direct labor		83
Manufacturing overhead		34
Unit product cost	$	264

Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $6 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 $5 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:

What effect would accepting this order have on the company’s net operating income if a special price of $366.00 per bracelet is offered for this order? (Enter all amounts as positive values.)

Answer 1

Particulars	Per unit	Total for 25 bracelets
Incremental revenue	336	8,400
Incremental costs
Variable costs
Direct materials	147	3,675
Direct labor	83	2,075
Variable manufacturing overhead	6	150
Special filigree	5	125
Total variable cost		6,025
Fixed costs
Purchase of special tool		451
Total incremental cost		6,476
Incremental net operating income		1,924
Company's net operating income would increase by $1,924 if the special order is accepted. So, we should accept the order even if the special price is lower than the company's regular price.