Question

Imperial Jewelers is considering a special order for 22 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	$	150
Direct labor		81
Manufacturing overhead		35
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, $12 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 $11 per bracelet and would also require acquisition of a special tool costing $459 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: 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.) Total 22 Per Unit Bracelets Incremental revenue Incremental costs: Variable costs: Direct materials Direct labor Variable manufacturing overhead Special filigree Total variable cost Fixed costs: Purchase of special tool Total incremental cost Incremental net operating income (loss) Should the special order be accepted at this price? Yes No

Answer 1

			Per	total 22
			unit	Bracelets
Incremental revenue			369	8118
incremental costs:
variable costs:
direct materials			150	3300
direct labor			81	1782
variable manufacturing overhead			12	264
special filigree			11	242
Total variable cost			254	5588
Fixed costs:
purchase of special tool				459
total incremental cost				6047
Incremental net operating income (loss)				2071
yes special order should be accepted

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