Question

Imperial Jewelers is considering a special order for 16 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $402.00 and its unit product cost is $258.00 as shown below:

Direct materials	$	142
Direct labor		82
Manufacturing overhead		34
Unit product cost	$	258

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 $454 that would have no other use once the special order is completed. This order would have no effect on the company. What effect would accepting this order have on the company's net operating income if a special price of $362.00 per bracelet is offered for this order? ( Enter all amounts as positive values)

Answer 1

1. Computation of Incrementotal Operating Income
	Per unit	total for 16 bracelets
Incrementotal revenue (a)	362	5,792
Incrementotal costs:
Variable costs:
Direct material	142	2,272
Direct labour	82	1,312
Variable manufacturing overhead	6	96
Special filigree	5	80
total variable costs	235	3,760
Fixed costs:
Purchase of special Tool		454
total incrementotal costs (b)		4,214
Incremental net operating income (a-b)		1,578