Question

Imperial Jewelers manufactures and sells a gold bracelet for $402.00. The company’s accounting system says that the unit product cost for this bracelet is $272.00 as shown below:

Direct materials	$	148
Direct labor		88
Manufacturing overhead		36
Unit product cost	$	272

The members of a wedding party have approached Imperial Jewelers about buying 19 of these gold bracelets for the discounted price of $362.00 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 $468 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?

Answer 1

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

	Per unit	Total
Incremental revenue (19*362)	362	6878
Incremental Cost
variable cost
Direct material (148*19)	148	2812
Direct labour (88*19)	88	1672
Variable overhead (8*19)	8	152
Additional Material	7	133
Total variable cost	251	4769
Fixed cost
Special tool		468
Total incremental Cost		5237
Incremental profit (loss)		1641

2) yes, Company should accept the order