Question

Imperial Jewelers 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		84
Manufacturing overhead		32
Unit product cost	$	262

The members of a wedding party have approached Imperial Jewelers about buying 13 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 increase the direct materials cost per bracelet by $14. Imperial Jewelers would also have to buy a special tool for $458 to apply the filigree to the bracelets. 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, $15.00 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

Differential analysis
			Reject	Accept	Effect on Income
Sales revenue (13*361)	0	4693	4693
Less: Expense
Material (146+14)*13	0	2080	-2080
Labour (84*13)		0	1092	-1092
Variable oh(15*13)		0	195	-195
Cost of Special Tool		0	458	-458
Net Income		0	868	868
Net Financial Advantage of special order: $ 868
Yes, accept the special order