Question

Imperial Jewelers is considering a special order for 23 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 $268.00 as shown below:   Direct materials $ 141       Direct labor 88       Manufacturing overhead 39       Unit product cost $ 268     Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $10 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 $9 per bracelet and would also require acquisition of a special tool costing $457 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: PART1. 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 values.) Per Total 23 Unit Bracelets Incremental revenue Incremental costs: Variable costs: Direct materials Direct labor Variable manufacturing overhead Special filigree Total variable cost $0 0 Fixed costs: Purchase of special tool Total incremental cost 0 Incremental net operating income (loss) $0

PART2.

Should the special order be accepted at this price?

Answer 1

• All working forms part of the answer
• Requirement 1

	Per	Total 23
	Unit	Bracelets
	[A]	[A x 23]
Incremental revenue	$                                  368.00	$                            8,464.00
Incremental costs:
Variable costs:
Direct materials	$                                  141.00	$                            3,243.00
Direct labor	$                                    88.00	$                            2,024.00
Variable manufacturing overhead	$                                    10.00	$                               230.00
Special filigree	$                                      9.00	$                               207.00
Total variable cost	$                                  248.00	$                            5,704.00
Fixed costs:
Purchase of special tool		$                               457.00
Total incremental cost		$                            6,161.00
Incremental net operating income (loss)		$                            2,303.00

• Requirement 2

Since the Incremental Net Operating Results are positive ( $ 2,303 Net operating income) , the special order should be accepted at this price.