Question

Imperial Jewelers is considering a special order for 20 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $189.95 and its unit product cost is $149.00 as shown below:

Direct materials	$	84.00
Direct labor		45.00
Manufacturing overhead		20.00
Unit product cost	$	149.00

Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $4.00 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 $2.00 per bracelet and would also require acquisition of a special tool costing $250 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 $169.95 per bracelet is offered for this order? (Enter all amounts as positive values. Round your answers to 2 decimal places.)

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

	Yes
	No

Answer 1

	Incremental benefit by accepting special order
Selling price per unit	$                  169.95
Less:Direct Materials per unit	$                    84.00
Less:Direct labor per unit	$                    45.00
Less:Variable Manufacturing overhead per unit	$                      4.00
Less:Additional materials cost per unit	$                      2.00
Less:Special tool cost per unit($250/20)	$                    12.50
Net Operating Income per unit	$                    22.45
Net Operating Income($22.45*20)	$                       449
The Special order should be accepted as it results into a increase in Net Operating Income