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 $262.00 as shown below:

Direct materials	$	142
Direct labor		82
Manufacturing overhead		38
Unit product cost	$	262

The members of a wedding party have approached Imperial Jewelers about buying 24 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 $458 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

• It should be noted that there is no effect on ability to produce and sell jewelry to other customers if this order is accepted. It means the company have spare capacity to produce and will not lose revenue on regular customers by honoring this order.
• Manufacturing overhead allocated per unit is $38 for regular customers. But out of $38, only $6 is variable cost. Rest $32 allocation is fixed. There would not be any impact on fixed overhead on acceptance of this order but $6 of variable overhead will be incurred on the number of bracelets to be sold. In conclusion, we can say the relevant cost under Overhead is Variable overhead of $6 only.
• Current Direct Material cost for bracelet is $142. Since members of wedding party extra work to be done on bracelet, company will incur extra $5 of material cost. New material cost would be $142 + $5= $147
• A Special tool at cost of $458 will be bought to deliver special order. Since this tool will not have further use, we will consider it as relevant cost for this order.

Let’s compute new relevant cost per unit and relevant cost for this order.

Particulars	Per unit	for 24 bracelets
Direct Material	147	3528
Direct Labor	82	1968
Variable Manufacturing Overhead	6	144
Special Tool		458
Total relevant cost		6098

Solution A (Financial Advantage - $2710):

Company will receive a revenue of $367 per bracelet for 24 bracelets.

Total revenue= 8,808

Relevant cost for this order= $6,098

Financial Advantage = $8808 - $6074 = $2710

Solution B: Yes the company should accept the order since it will add an additional profit of $2,710.