Imperial Jewelers is considering a special order for 13 handcrafted gold bracele

Question

Imperial Jewelers is considering a special order for 13 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 $278.00 as shown below:

Direct materials $ 149

Direct labor 90

Manufacturing overhead 39

Unit product cost $ 278

Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $13 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 $12 per bracelet and would also require acquisition of a special tool costing $469 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: 1. 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.)

2. Should the special order be accepted at this price? Yes No

Explanation / Answer

b) The offer should be accepted, as the accepting offer will not affect the regular sales for the company and accepting apecial offer will increase the profit by $870

Direct material $     149.00 Direct labour $       90.00 Variable manufacturing overhead $       13.00 Additional material $       12.00 Manufacturing cost per bracelet $     264.00 Relevant cost of making 13 bracelets $ 3,432.00 Add: cost of the machine (as the machine will have no use in futire) $     469.00 Total relevant cost for the special order (a) $ 3,901.00 Price per bracelet $     367.00 Total price offered per bracelet (b) $ 4,771.00 Net profit from special order (b-a) $     870.00

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