Question

Imperial Jewellers is considering a special order for 30 handcrafted gold bracelets for a major upscale wedding. The gold bracelets are to be given as gifts to members of the wedding party. The normal selling price of a gold bracelet is $195.50 and its unit product cost is $185.00, as shown:

  

Materials	$	90.00
Direct labour		49.50
Manufacturing overhead		45.50
Unit product cost	$	185.00

The manufacturing overhead is largely fixed and unaffected by variations in how much jewellery is produced in any given period. However, 20% of the overhead is variable with respect to the number of bracelets produced. The customer interested in the special bracelet order would like special filigree applied to the bracelets. This would require additional materials costing $10.50 per bracelet and would also require acquisition of a special tool costing $450 that would have no other use once the special order was 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.

  

What effect would accepting this order have on the company’s net operating income if a special price of $194.00 is offered per bracelet for this order?

  

Should the special order be accepted at this price?

	Yes
	No

Answer 1

The net operating income would be negative I.e, it will become net operating loss of $16.50 if the offer is accepted at a price of $194.00 because the total cost of production exceeds the price offered which is mainly because of additional material required and special tool which will be only used for special order. If there is no involvement of the above mentioned additional and special costs, the order can be accepted but in this case, it is not advisable to do so as it leads to operating loss.

Therefore, the answer for whether to accept the special order at this price will be NO.

A rough working note is attached below for your kind reference. Thank you.