Imperial Jewelers is considering a special order for 26 handcrafted gold bracele

Question

Imperial Jewelers is considering a special order for 26 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $407.00 and its unit product cost is $275.00 as shown below:

Direct materials $ 147

Direct labor 89

Manufacturing overhead 39

Unit product cost $ 275

Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $10 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 $9 per bracelet and would also require acquisition of a special tool costing $457 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: What effect would accepting this order have on the company’s net operating income if a special price of $367.00 per bracelet is offered for this order? (Enter all amounts as positive values.)

Explanation / Answer

Answer :

Working Notes for the above answer is as under

Only the incremental cost and benefit are relevant. In particular only the variable manufacturing overhead and cost of special tool are relevant overhead cost in this situation . The other manufacturing overhead cost are fixed and not affexted by decision

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