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 $408.00 and its unit product cost is $262.00 as shown below:

Direct materials	$	147
Direct labor		85
Manufacturing overhead		30
Unit product cost	$	262

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 $470 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 $368.00 per bracelet is offered for this order? (Enter all amounts as positive

	Per Total 17 Unit Bracelets Incremental revenue Incremental costs: Variable costs: Direct materials Direct labor Variable manufacturing overhead Special filigree Total variable cost Fixed costs: Purchase of special tool Total incremental cost Incremental net operating income (loss)

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

Answer 1

1.

	Per unit	Total 17 Bracelets
Incremental Revenue	$   368.00	$                         6,256
Incremental Costs
Variable Costs
Direct Material	$   147.00	$                         2,499
Direct Labour	$     85.00	$                         1,445
Variable Manufacturing OH	$     13.00	$                             221
Additional filigree	$     12.00	$                             204
Total Variable cost	$   257.00	$                         4,369
Fixed Costs
Purchase of Special Tool		$                             470
Total Incremental Cost		$                         4,839
Incremental Net operating Income		$                         1,417

Should accept the special order. so they can earn an additional income of $1,417