Question

Sofia manufactures and sells a gold bracelet for $401.00. The company’s accounting system says that the unit product cost for this bracelet is $262.00 as shown below:

Direct materials	$	146
Direct labor		85
Manufacturing overhead		31
Unit product cost	$	262

The members of a wedding party have approached Sofia about buying 26 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 Sofia to buy a special tool for $455 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, Sofia 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.

What is the financial advantage (disadvantage) of accepting the special order from the wedding party?

___________

Answer 1

Solution :

Incremental Revenue / Cost Analysis :

Particulars	Per Unit	For Total 26 Units (Per Unit * 26)
(a) Incremental Revenue	$ 361.00	$ 9,386.00
Incremental Cost :
Direct Material	$ 146.00	$ 3,796.00
Direct Labor	$ 85.00	$ 2,210.00
Variable Manufacturing OH	$ 12.00	$ 312.00
Additional Material Cost	$ 11.00	$ 286.00
Fixed Cost of Tool		$ 455.00
(b) Total Incremental Cost		$ 7,059.00
Financial Advantage (a - b)		$ 2,327.00

There is a financial advantage of $ 2,327 therefore company should accept the special order.

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