Question

imperial Jewelers manufactures and sells a gold bracelet for $404.00. The company’s accounting system says that the unit product cost for this bracelet is $256.00 as shown below:

Direct materials	$	145
Direct labor		80
Manufacturing overhead		31
Unit product cost	$	256

The members of a wedding party have approached Imperial Jewelers about buying 17 of these gold bracelets for the discounted price of $364.00 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 $451 and that would increase the direct materials cost per bracelet by $12. 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, $13.00 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

	Per Unit	Total
		for 17
		Bracelets
Incremental revenue	$364.00	$6,188.00
Incremental costs:
Variable costs:
Direct materials (145+12)	145	2,465.00
Direct labor	80	1,360.00
Variable manufacturing overhead	13	221.00
Special filigree	12	204.00
Total variable cost	$250.00	4,250.00
Fixed costs:
Purchase of special tool		451
Total incremental cost		4,701.00
Incremental net operating income		1,487.00

Note:

Only the incremental costs and benefits are relevant. In particular, only the variable manufacturing overhead and the cost of the special tool are relevant overhead costs in this situation. The other manufacturing overhead costs are fixed and are not affected by the decision

__________________________

2

Should the company accept the special order?

Answer: Yes

Explanation

Even though the price for the special order is below the company's regular price for such an item, this special order had incresed company's net operating income and so it should be accepted.