Question

Imperial Jewelers manufactures and sells a gold bracelet for $406.00. The company's accounting system says that the unit product cost for this bracelet is $260.00 as shown below: Direct materials Direct labor Manufacturing overhead Unit product cost 30 The members of a wedding party have approached Imperial Jewelers about buying 19 of these gold bracelets for the discounted price of $366.00 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 $470 and that would increase the direct materials cost per bracelet by $4. 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, $5.00 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? Complete this question by entering your answers in the tabs below. Required 1 Required 2 What is the financial advantage (disadvantage) of accepting the special order from the wedding party?

Answer 1

19 For special order, variable administrative costs and fixed costs will not be affected and so they are irrelevant costs for the special order. In other words, variable costs of bracelets produced alone shall be considered as relevant costs along with any additional special order cost. That is, Number of bracelets on wedding party order Wedding party order price per bracelet $366 Wedding party order revenue $6,954 (19 x $366] Less: Relevant variable costs for wedding party order $4,541 (Ref: Workings] Relevant fixed costs for wedding party order $470 [Special tool which is specially purchased] 1) Financial advantage from wedding party order $1,943 2) Yes, the company should accept the special wedding order from an operating profit perspective. Workings: Direct materials Direct labor Variable overhead cost Additional material cost for wedding party order Relevant variable costs of bracelets for wedding party order $2,774 [19 bracelets x $146] $1,596 [19 bracelets x $84] $95 (19 bracelets x $5] $76 (19 bracelets x $4] $4,541 NOTE: Cost of special tool purchased for this order also shall be considered because it is a specific capital cost for this. Increase in material cost also shall be considered as it is relevant cost for wedding order.