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 $259.00 as shown below:

Direct materials	$	143
Direct labor		81
Manufacturing overhead		35
Unit product cost	$	259

The members of a wedding party have approached Imperial Jewelers about buying 27 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 $467 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

1.

Direct material = $143 per bracelet

In the special order, direct material cost will increase by $5 per bracelet.

Hence, direct material cost in special order = 143 + 5

= $148 per bracelet

Variable manufacturing overhead = $6 per bracelet

Due to the acceptance of special order, fixed manufacturing overheads will not increase and thus fixed manufacturing overheads are not relevant in deciding whether to accept the special order or not.

Analysis of special order

Sales revenue (27 x 364)	9,828
Costs:
Direct material (27 x 148)	-3,996
Direct labor (27 x 81)	-2,187
Variable manufacturing overhead (27 x 6)	-162
Special tool	- 467
Net income	$3,016

Financial advantage of accepting the special order from the wedding party = $3,016

2.

The company should accept the special order since it will generate an additional income of $3,016