Question

Imperial Jewelers manufactures and sells a gold bracelet for $406.00. The company's accounting system says that the unit product cost for this bracelet is $260.00 as shown below: Direct materials Direct labor Manufacturing overhead Unit product cost The members of a wedding party have approached Imperial Jewelers about buying 19 of these gold bracelets for the discounted price of $366.00 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 $470 and that would increase the direct materials cost per bracelet by $4. 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, $5.00 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? Complete this question by entering your answers in the tabs below. Required 1 What is the financial advantage (disadvantage) of accepting the special order from the wedding party? Financial advantage

Answer 1

Financial advantage of accepting special order is to be determined by considering incremental cost and incremental revenue.

Incremental costs are variable costs which are affected by accepting special order.fixed costs that are constant will be ignored as it is not affected by special order.

	Amount	Working
Sales revenue	$6,954	$366*19 bracelets
Less: Incremental cost
Direct Materials	$2,850	($146+$4)*19
Direct labor	$1,596	($84*19)
Manufacturing overhead	$95	($5 variable cost*19)
Special Tool cost	$470
Net financial advantage(disadvantage)	$1,943	[6954-2850-1596-95-470]

There will be financial advantage of $1,943

b) Yes, the special order should be accepted as it results in financial advantage and will increase net income of the company by $1,943