Question

Imperial Jewelers is considering a special order for 20 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 $260.00 as shown below: Direct materials $ 143 Direct labor 85 Manufacturing overhead 32 Unit product cost $ 260 Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $10 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 $9 per bracelet and would also require acquisition of a special tool costing $456 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.) 2. Should the special order be accepted at this price? No Yes References WorksheetDifficulty: 1 Easy

Answer 1

Incremental analysis

	Per Unit	Total
Revenue	367	7340
Incremental Cost
Variable cost
Direct material	143	2860
Direct labor	85	1700
Variable overhead	10	200
Additional material	9	180
Total variable cost	247	4940
Fixed cost
Special Tool		456
Total incremental Cost		5396
Incremental profit (loss)		1944

2) Yes, Company should accept special order at this price