Question

Imperial Jewelers manufactures and sells a gold bracelet for $403.00. 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 $148 81 31 $260 The members of a wedding party have approached Imperial Jewelers about buying 27 of these gold bracelets for the discounted price of $363.00 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 $459 and that would increase the direct materials cost per bracelet by $10. 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, $11.00 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

Incremental analysis

	Per unit	Total
Incremental revenue	363	9801
Incremental cost
Variable cost
Direct material	148	3996
Direct labor	81	2187
variable overhead	11	297
Additional material	10	270
Total variable cost	250	6750
Fixed cost
Special tool		459
Total incremental cost		7209
Incremental profit (loss)		2592

2) Yes accepted