Question

Chapter 12 EXERCISE 12-4 Special Order Decision LO12-4 Imperial Jewelers manufactures and sells a gold bracelet for $189 system says that the unit product cost for this bracelet is $149.00 as show Comp 84.00 45.00 20.00 . . . . Direct materials Direct labor. Manufacturing overhead The members of a wedding party have approached Imperial Jewelers about h bracelets for the discounted price of $169.95 each. The members of the weddin special filigree applied to the bracelets that would require Imperial Jewelers for $250 and that would increase the direct materials cost per bracelet by $2.00 would have no other use once the special order is completed. buying 20 of these pu to buy a special wn To analyze this special order opportunity, Imperial Jewelers has determined that most o manufacturing overhead is fixed and unaffected by variations in how much jewelry is prodme in any given period. However, $4.00 of the overhead is variable with respect to the numbr d bracelets produced. The company also believes that accepting this order would have no effet n ability to produce and sell jewelry to other customers. Furthermore, the company could fulfilt wedding party's order using its existing manufacturing capacity. Required: 1. What is the financial advantage (disadvantage) of accepting the special order from the wol most of t ding party? Should the company accept the special order? 2.

Answer 1

1	Computation of financial advantage (disadvantage) of accepting the special order from the wedding party:-
	The company has idle capacity to accept the special order for 20 gold bracelets . So the relevant cost to consider is only variable cost and special tool cost.
	Cost Benefit Analysis of Special Order
		Units	Per Unit	Amount
	Incremental Revenue	20	$     169.95	$                          3,399
	Less: Relevant Cost
	Direct Materials ($84+$2)	20	$       86.00	$                          1,720
	Direct labor	20	$       45.00	$                             900
	Variable Manufacturing overhead	20	$          4.00	$                               80
	Special Tool Cost			$                             250
	Financial advantage of accepting the special order			$                             449
2	Decision: The company should accept the special order because there is financial advantage of $449

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