Question

Imperial Jewelers manufactures and sells a gold bracelet for $410.00. The company’s accounting system says that the unit product cost for this bracelet is $265.00 as shown below:

Direct materials	$	145
Direct labor		88
Manufacturing overhead		32
Unit product cost	$	265

The members of a wedding party have approached Imperial Jewelers about buying 30 of these gold bracelets for the discounted price of $370.00 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 $456 and that would increase the direct materials cost per bracelet by $10. 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, $11.00 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

Calculation of financial advantage or disadvantage
Particulars                                                  30 unit				per unit	amount
incremental revenue 30*370				370	11100
less: Variable cost
Direct material				145	4350
Direct labour				88	2640
variable overhead				11	330
special filigree				10	300
Total variable cost (B)				254	7620
fixed cost - special tool					456
total incremental cost					8076
incremental profit/loss					3024
2) accept special order should accept because of financal advantage of $3024
therefore special order can be accepted

answered by: anonymous