Question

Imperial Jewelers manufactures and sells a gold bracelet for $403.00. The company’s accounting system says that the unit product cost for this bracelet is $264.00 as shown below:

Direct materials	$	150
Direct labor		80
Manufacturing overhead		34
Unit product cost	$	264

The members of a wedding party have approached Imperial Jewelers about buying 25 of these gold bracelets for the discounted price of $363.00 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 $470 and that would increase the direct materials cost per bracelet by $12. 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, $13.00 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

Answer for 1)

Cost to be incurred:

[($264+$12(i.e increase in cost of direct material)-$21*)×25units]+$470**=$6845

*Here given that fixed overhead doesn't change with change in output and also this offer don't effect sales to other customers and hence no need of fixed manufacturing over heads to be incurred which is Total manufacturing overhead-variable manufacturing overhead(I.e $34-$13=$21)

**The machine entire cost to be included as the machine is useless after this special order.

Total revenue : $363×25 units=$9075

Financial advantage (disadvantage):$9075-$6845=$2230

Answer for 2)

Here, I would say that Comapany should accept the deal as it earns $2230 additional profit through accepting it.