Question

Imperial Jewelers manufactures and sells a gold bracelet for $406.00. The company’s accounting system says that the unit product cost for this bracelet is $259.00 as shown below:

Direct Materials: $143

Direct Labor: 85

Manufacturing overhead: 31

Unit product cost: $259

The members of a wedding party have approached Imperial Jewelers about buying 19 of these gold bracelets for the discounted price of $366.00 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 $465 and that would increase the direct materials cost per bracelet by $6. 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, $7.00 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?

Answer 1

Let the company was manufacturing M number of bracelets before this offer. This volume will not be affected by the offer as per the case facts.

The variable overhead cost is $7 per bracelet and the fixed overhead cost is $24 per bracelet. A total fixed overhead cost of $24M is incurred whether we accept or reject the offer. So, the amount concerning to the fixed overhead is irrelevant for the analysis as it is already incurred.

Now consider the following cost sheet for the 19 more bracelets -

Selling price		$366
Direct Materials	$143+$6=$149
Direct Labor	$85
Variable overhead	$7
Total variable cost/ unit		$241
Contribution margin/ unit	$366 - $241	$125
Contribution margin	$125 x 19	$2,375
Fixed overhead	Irrelevant	-
Cost of tooling		$465
Profit	$2,375 - $465	$1,910

Since the profit (economic advantage) is $1,910, the offer can be accepted.