Question

Exercise 12-4 Evaluating a Special Order [LO12-4]

Imperial Jewelers is considering a special order for 12 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $404.00 and its unit product cost is $261.00 as shown below:

Direct materials	$	143
Direct labor		87
Manufacturing overhead		31
Unit product cost	$	261

Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $7 of the overhead is variable with respect   to the number of bracelets produced. The customer who is interested in the special bracelet order would like special filigree applied to the bracelets. This filigree would require additional materials costing $6 per bracelet and would also require acquisition of a special tool costing $470 that would have no other use once the special order is completed. This order would have no effect on the company’s regular sales and the order could be fulfilled using the company’s existing capacity without affecting any other order.

Required:

What effect would accepting this order have on the company’s net operating income if a special price of $364.00 per bracelet is offered for this order? (Enter all amounts as positive values.)

	Per	Total 12
	Unit	Bracelets
Incremental revenue
Incremental costs:
Variable costs:
Direct materials
Direct labor
Variable manufacturing overhead
Special filigree
Total variable cost
Fixed costs:
Purchase of special tool
Total incremental cost
Incremental net operating income (loss)

Should the special order be accepted at this price?

	No
	Yes

Answer 1

SOLUTION

	Per Unit ($)	Total for 12 bracelets ($)
Incremental revenue	364	4,368
Incremental costs:
Variable costs:
Direct materials	143	1,716
Direct labor	87	1,044
Variable manufacturing overhead	7	84
Special filigree	6	72
Total variable cost (A)		2,916
Fixed costs:
Purchase of special tool (B)		470
Total incremental cost (A+B)		3,386
Incremental net operating income		982

Even though the price for the special order is below the company's regular price for such an item,the special order would add to the company's net operating income and should be accepted. This conclusion would not necessarily follow if the special order affected the regular selling price of bracelets or if it required the use of a constrained resource.