Question

Imperial Jewelers manufactures and sells a gold bracelet for $409.00. The company's accounting system says that the unit product cost for this bracelet is $265.00 as shown below: $144 Direct materials Direct labor Manufacturing overhead Unit product cost The members of a wedding party have approached Imperial Jewelers about buying 14 of these gold bracelets for the discounted price of $369.00 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 $454 and that would increase the direct materials cost per bracelet by $7. 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, $8.00 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 Required 2 What is the financial advantage (disadvantage) of accepting the special order from the wedding party?

Answer 1

1) Determine whether acceptance of order will result in financial advantage or not: Amount Particulars Net operating income. The order will result in financial advantage to the business. $1.254 The acceptance special order will result in net income of $1,254. Hence, the order will result in financial advantage to the business. Working notes: Determine the net operating income: Particulars Per unit cost $369 Amount $5,166 Incremental revenue Less: Incremental costs $144 $88 $2.016 $1.232 $8 $112 $98 Direct labor Variable Manufacturing overhead Special filigree Special tool Total Incremental costs Net operating income $454 $3.912 $1.254

Explain whether the company should accept or reject the order: Particulars Yes, the company should accept the order. The acceptance of special order will increase the net operating income of $1,254. Hence, the company should accept the special order.