Question

Exercise 10-4 Evaluating a Special Order [LO10-4]

Imperial Jewelers is considering a special order for 21 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $402.00 and its unit product cost is $257.00 as shown below:

Direct materials	$	143
Direct labor		81
Manufacturing overhead		33
Unit product cost	$	257

Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $14 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 $13 per bracelet and would also require acquisition of a special tool costing $459 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:

1.	What effect would accepting this order have on the company’s net operating income if a special price of $362.00 per bracelet is offered for this order? (Enter all amounts as positive values.)

2.

Should the special order be accepted at this price?

	Yes
	No

Answer 1

1) What effect would accepting this order have on the company’s net operating income if a special price of $362.00 per bracelet is offered for this order?

	Per unit	Total
Incremental revenue	362	7602
Incremental cost
Variable cost
Direct material	143	3003
Direct labour	81	1701
Variable manufacturing overhead	14	294
Special filigree	13	273
Total variable cost	251	5271
Fixed cost
Special tool		459
Total incremental cost		5730
Incremental profit (loss)		1872

2) Yes, Special order should be accepted at this price.