Question

Imperial Jewelers manufactures and sells a gold bracelet for $407.00. The company’s accounting system says that the unit product cost for this bracelet is $267.00 as shown below:

Direct materials	$	147
Direct labor		88
Manufacturing overhead		32
Unit product cost	$	267

The members of a wedding party have approached Imperial Jewelers about buying 20 of these gold bracelets for the discounted price of $367.00 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 $468 and that would increase the direct materials cost per bracelet by $5. 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, $6.00 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

1. Calculation of Financial advantage or disadvantage of accepting the special order:-

Variable Cost per unit (for special order) = Direct Material + Direct Labor + Variable Manufacturing Overhead

Variable Cost per unit (for special order) = ($147+$5) + $88 + $6 = $246 per unit

Therefore Contribution per unit (for special order) = Sales Price per unit (-) Variable Cost per unit = $367 - $246 = $121

Total Additional Contribution for special order = $121 x 20 = $2,420

Additional Fixed Expenses for special order = $468

Financial Advantage from special order = $2,420 - $468 = $1,952

2. As there is a financial advantage of $1,952 from accepting special order without affecting current ability to produce and fulfil orders to other customers, it is advisable to accept the special order.

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