Question

Imperial Jewelers is considering a special order for 22 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $405.00 and its unit product cost is $267.00 as shown below:

Direct materials	$	148
Direct labor		86
Manufacturing overhead		33
Unit product cost	$	267

Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $11 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 $10 per bracelet and would also require acquisition of a special tool costing $464 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:

1.	What effect would accepting this order have on the company’s net operating income if a special price of $365.00 per bracelet is offered for this order? (Enter all amounts as positive values.)

2.	Should the special order be accepted at this price?
	Yes No

Answer 1

1) Incremental analysis

	Per unit	Total
Incremental revenue	365	8030
Incremental cost
Variable cost
Direct material	148	3256
Direct labor	86	1892
Variable overhead	11	242
Additional material	10	220
Total variable cost	255	5610
Fixed cost
Special tool		464
Total incremental Cost		6074
Incremental profit (loss)		1956

2) Yes, special order should be accepted