Question

Imperial Jewelers manufactures and sells a gold bracelet for $405.00. The company’s accounting system says that the unit product cost for this bracelet is $253.00 as shown below:

Direct materials	$	143
Direct labor		80
Manufacturing overhead		30
Unit product cost	$	253

The members of a wedding party have approached Imperial Jewelers about buying 13 of these gold bracelets for the discounted price of $365.00 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 $458 and that would increase the direct materials cost per bracelet by $11. 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, $12.00 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

Imperial Jewellers
	Per unit	Total 13 Bracelets
Incremental Revenue	365	4745
Incremental costs :
Variable Costs
DM	143	1859
DL	80	1040
VOH	12	156
Special filigree	11	143
Total VC	246	3198
FC
Purchase of Special tool		458
Total Incremental cost		3656
Incremental NOI		1089
The special order can be accepted at this price since it is generating net operating income of $ 1089
Financial advantage of accepting the order is $ 1089.