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 $268.00 as shown below: $146 87 Direct materials Direct labor Manufacturing overhead Unit product cost 35 $ 268 The members of a wedding party have approached Imperial Jewelers about buying 26 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 $463 and that would increase the direct materials cost per bracelet by $12. 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, $13.00 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

9,464 4,108 2,262 338 Revenue Variable Expense: Direct Material Direct Labor Variable manufacturing OH Total Variable Expense Contribution Mragin Fixed Expense: Purchase of Special tool Net Operating income 6,708 2,756 463 2,293 Financial Advantage of accepting this special order is $ 2293. Working Revenue Direct Material Direct Labor Variable manufacturing OH By accepting this special order direct material increases by $12. $364 x 26 Units (146 +12) x 26 units $87 x 26 units $13 x 26 units All the relevant costs of special order is taken into consideration while making the decision, Fixed mfg OH will not be affected by accepting this order so these costs are not considered. 2 Company should accept this special order as it will earn $ 2293 from this order.