Question

Imperial Jewelers manufactures and sells a gold bracelet for $404.00. The company’s accounting system says that the unit product cost for this bracelet is $268.00 as shown below:

Direct materials	$	147
Direct labor		89
Manufacturing overhead		32
Unit product cost	$	268

The members of a wedding party have approached Imperial Jewelers about buying 25 of these gold bracelets for the discounted price of $364.00 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 $8. 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, $9.00 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?

Answer 1

1.

Computation of Financial advantage (disadvanatge) from special order - Imperial Jewellers
Particulars	Per unit	Total 25 Bracelet
Incremental revenue (A)	$364.00	$9,100
Incremental Costs:
Variable cost:
Direct material	$147	$3,675
Direct labor	$89	$2,225
Variable manufacturing overhead	$9	$225
Special filigree Direct material cost increase	$8	$200
Total Variable cost (B)	$253	$6,325
Fixed Costs:
Purchase of Special tool (C )		$454
Total Incremental Cost (D = B+C)		$6,779
Financial advantage (disadvantage) from special order (A - D)		$2,321

2.

Yes, the company should accept the special order as there is financial advantage of $2,321.