Question

Imperial Jewelers is considering a special order for 21 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $409.00 and its unit product cost is $266.00 as shown below:

Direct materials	$	143
Direct labor		86
Manufacturing overhead		37
Unit product cost	$	266

Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $11 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 $10 per bracelet and would also require acquisition of a special tool costing $468 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:

1.	What effect would accepting this order have on the company’s net operating income if a special price of $369.00 per bracelet is offered for this order? (Enter all amounts as positive values.)

2.	Should the special order be accepted at this price?
	Yes No

Answer 1

1.

	Per unit	Total 21 Bracelets
Incremental Revenue	$         369	$                         6,273
Incremental Costs
Variable Costs
Direct Material	$         143	$                         3,003
Direct Labour	$           86	$                         1,806
Variable Manufacturing OH	$           11	$                             231
Special Filigree	$           10	$                             210
Total Variable cost	$         250	$                         5,250
Fixed Costs
Purchase of Special Tool		$                             468
Total Incremental Cost		$                         5,718
Incremental Net operating Income		$                             555

2. Compnay should accept special order, since they can earn an additinal revenue of $555