Question

Imperial Jewelers manufactures and sells a gold bracelet for $403.00. The company’s accounting system says that the unit product cost for this bracelet is $264.00 as shown below:
Direct materials $143
Direct labor 90
Manufacturing overhead 31
Unit product cost $264


The members of a wedding party have approached Imperial Jewelers about buying 22 of these gold bracelets for the discounted price of $361.00 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 $454 and that would increase the direct materials cost per bracelet by $8. 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?2. Should the company accept the special order?

Answer 1

Answer:

a) Financial advantage   $2,208

b) The company should accept the special order, as it will increase its profit by $2,208

Explanation:

The relevant costs for decision to accept the special order are  

I Incremental Revenue from the special order  

2. incremental variable cost

3. The cost of the special tool

Unit variable cost = 143 + 90 + 8 + 7 = $240

Note that that the increase in material cost of $8 and the variable manufacturing overhead of $7 are relevant to the special order decision. Hence they are added.

And the balance of manufacturing overhead would be incurred either way. Therefore , they are not relevant for the decision

                                                                                                       $

Sales revenue from special order

(22× $361.00)                                                                               7942

Variable cost of special order

(22× $240 )                                                                                    (5280 )

Cost of special tool                                                                       (454)

Financial advantage                                                                     2,208

The company should accept the special order, as it will increase its profit by $2,208