Question

Imperial Jewelers is considering a special order for 15 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $407.00 and its unit product cost is $263.00 as shown below: $142 86 35 Direct materials Direct labor Manufacturing overhead Unit product cost $263 Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $11 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 $10 per bracelet and would also require acquisition of a special tool costing $458 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: 1. What effect would accepting this order have on the company's net operating income if a special price of $367.00 per bracelet is offered for this order? (Enter all amounts as positive values.) Per Total 15 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)

Answer 1

	Per Unit	Total 15 Brackets
Incremental Revenue	$367	$5505
Incremental Costs:
Variable Costs:
Direct Material	$142	$2130
Direct Labor	$86	$1290
Variable Manufacturing Overhead	$11	$165
Special filigree	$10	$150
Total Variable cost	$249	$3735
Fixed costs:
Purchase of Special Tool		$458
Total Incremental cost		$4193
Incremental net operating Income (Loss)		$1312

There is incremental profit of $1312 on accepting the offer.

Therefore, offer should be accepted.