Question

Imperial Jewelers manufactures and sells a gold bracelet for $401.00. The company's accounting system says that the unit product cost for this bracelet is $263.00 as shown below Direct materials $146 Direct labor 81 Manufacturing overhead 36 $263 Unit product cost The members of a wedding party have approached Imperial Jewelers about buying 27 of these gold bracelets for the discounted price of $361.00 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 $461 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?

Answer 1

1) Calculate financial advantage (disadvantage)

	Per unit	Total 27
Incremental revenue	361	9747
Incremental Cost
Variable cost
Direct material	146	3942
Direct labor	81	2187
Variable manufacturing overhead	12	324
Additonal material	11	297
Total variable cost	250	6750
Fixed cost
Special tool		461
Total incremental Cost		7211
Incremental profit (loss)		2536