Question

Imperial Jewelers is considering a special order for 17 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $401.00 and its unit product cost is $265.00 as shown below:

Direct materials	$	142
Direct labor		88
Manufacturing overhead		35
Unit product cost	$	265

Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $6 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 $5 per bracelet and would also require acquisition of a special tool costing $455 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:

What effect would accepting this order have on the company’s net operating income if a special price of $361.00 per bracelet is offered for this order? (Enter all amounts as positive values.)

Per Unit Total 17 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)

Should the special order be accepted at this price?

Yes No

Answer 1

	Per	Total 17
	Unit	Bracelets
Incremental revenue	$361	$6,137
Incremental costs:
Variable costs:
Direct material	$142	$2,414
Direct labor	$88	$1,496
Variable manufacturing overhead	$6	$102
Special filgree	$5	$85
Total variable cost	$241	$4,097
Fixed costs:
Purchase of special tool		$455
Total incremental cost		$4,552
Incremental net operating income (loss)		$1,585

Yes, the special order should be accepted.