Question

Imperial Jewelers manufactures and sells a gold bracelet for $409.00. The company’s accounting system says that the unit product cost for this bracelet is $265.00 as shown below: Direct materials $ 149 Direct labor 84 Manufacturing overhead 32 Unit product cost $ 265 The members of a wedding party have approached Imperial Jewelers about buying 20 of these gold bracelets for the discounted price of $369.00 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 $465 and that would increase the direct materials cost per bracelet by $13. 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, $14.00 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

Part -(1)	Particulars	Per unit	Total for 20 bracelets
	Incremental revenue	369	7,380
	Incremental costs:
	Variable costs:
	Direct materials	149	2,980
	Direct labor	84	1,680
	Variable manufacturing overhead	14	280
	Special filigree	13	260
	Total variable cost	260	5,200
	Fixed costs:
	Purchase of special tool		465
	Total incremental cost		5,665
	Financial advantage of accepting the special order		1,715
Part -(2)	Company should accept the special order even though the price offered is less since there is incremental profit to the company