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 $261.00 as shown below: Direct materials $ 142 Direct labor 88 Manufacturing overhead 31 Unit product cost $ 261 The members of a wedding party have approached Imperial Jewelers about buying 23 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 $457 and that would increase the direct materials cost per bracelet by $6. 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, $7.00 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

Answer 1)

Statement of cost benefit due to acceptance of special order of 23 bracelets

	Amount (In $)
Sales Value (23 bracelets X $ 364 per bracelet)	8,372
Total Sales revenue from special order(a)	8,372
Cost to be incurred due to acceptance of offer:
Direct Materials (23 bracelets X $ 148 per bracelet)	3,404
Direct Materials (23 bracelets X $ 88 per bracelet)	2,024
Variable Manufacturing overhead (23 bracelet X $ 7 per bracelet)	161
Cost of Special tool	457
Total relevant cost of special order (b)	6,046
Net Benefit (a) - (b)	2,326

The financial advantage from the acceptance of special order is $ 2,326. It implies that the net income of the company will increase by $ 2,326 if the special order is accepted.

Answer 2)

Since the net income of the company will increase by $ 2,326 post acceptance of the special order, the special order should be accepted.