Question

Imperial Jewelers manufactures and sells a gold bracelet for $401.00. The company’s accounting system says that the unit product cost for this bracelet is $254.00 as shown below: Direct materials $ 142 Direct labor 81 Manufacturing overhead 31 Unit product cost $ 254 The members of a wedding party have approached Imperial Jewelers about buying 26 of these gold bracelets for the discounted price of $361.00 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 $467 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? The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow: Total Dirt Bikes Mountain Bikes Racing Bikes Sales $ 927,000 $ 266,000 $ 402,000 $ 259,000 Variable manufacturing and selling expenses 474,000 118,000 199,000 157,000 Contribution margin 453,000 148,000 203,000 102,000 Fixed expenses: Advertising, traceable 69,000 8,200 40,600 20,200 Depreciation of special equipment 44,500 20,900 7,900 15,700 Salaries of product-line managers 114,300 40,200 38,800 35,300 Allocated common fixed expenses* 185,400 53,200 80,400 51,800 Total fixed expenses 413,200 122,500 167,700 123,000 Net operating income (loss) $ 39,800 $ 25,500 $ 35,300 $ (21,000) *Allocated on the basis of sales dollars. Management is concerned about the continued losses shown by the racing bikes and wants a recommendation as to whether or not the line should be discontinued. The special equipment used to produce racing bikes has no resale value and does not wear out. Required: 1. What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes? 2. Should the production and sale of racing bikes be discontinued? 3. Prepare a properly formatted segmented income statement that would be more useful to management in assessing the long-run profitability of the various product lines.

Answer 1

Imperial Jewellers

As the direct material cost is higher by 413, and the seilling price is

lower by $40, the net financial disadvantage per unit is $53 per unit .

Therefore the total financial disadvantage from the order will be

26 x $53 = $1,378.

Working:

	Current	Special order	Difference
Selling Price	401	361	-40
Direct material	142	155	-13
Direct labor	81	81	0
Variable manufacturing overhead	14	14	0
Total variable cost	237	250	-13
Contribution margin	164	111	-53
Total order size			26
Financial disadvantage			-1378

Regal Cycle Company

1. Net financial adcantage / (disadvantage) = ($30,800)

2. Racing bikes division should naot be closed.

If the racing bikes segment is closed, the net operating income for the company will reduce by $30,800 and will be $9,000 . This is becuase the racing bikes division is contributing $39,800 to recover the common fixed expenses of the company. This is shown in the following table.

	Total		Dirt Bikes		Mountain Bikes
							Sales	668000	100.00%	266000	100.00%	402000	100.00%
Variable manufacturing
and selling expenses	317000	47.46%	118000	44.36%	199000	49.50%
Contribution margin	351000	52.54%	148000	55.64%	203000	50.50%
Traceable fixed Expenses
Advertising	48800	7.31%	8200	3.08%	40600	10.10%
Depreciation	28800	4.31%	20900	7.86%	7900	1.97%
Salaries	79000	24.92%	40200	34.07%	38800	19.50%
Total Traceable fixed expenses	156600	23.44%	69300	26.05%	87300	21.72%
Product Segment Margin	194400	29.10%	78700	29.59%	115700	28.78%
Common fixed expenses	185400
Net operating Income	9000

3. Segmented income statement should be presented in the following format.

	Total		Dirt Bikes		Mountain Bikes		Racing Bikes
									Sales	927000	100.00%	266000	100.00%	402000	100.00%	259000	100.00%
Variable manufacturing
and selling expenses	474000	51.13%	118000	44.36%	199000	49.50%	157000	60.62%
Contribution margin	453000	48.87%	148000	55.64%	203000	50.50%	102000	39.38%
Traceable fixed Expenses
Advertising	69000	7.44%	8200	3.08%	40600	10.10%	20200	7.80%
Depreciation	44500	4.80%	20900	7.86%	7900	1.97%	15700	6.06%
Salaries	114300	24.11%	40200	34.07%	38800	19.50%	35300	22.48%
Total Traceable fixed expenses	227800	24.57%	69300	26.05%	87300	21.72%	71200	27.49%
Product Segment Margin	225200	24.29%	78700	29.59%	115700	28.78%	30800	11.89%
Common fixed expenses	185400
Net operating Income	39800