Imperial Jewelers manufactures and sells a gold bracelet for $407.00. The compan
ID: 2530003 • Letter: I
Question
Imperial Jewelers manufactures and sells a gold bracelet for $407.00. The company’s accounting system says that the unit product cost for this bracelet is $262.00 as shown below:
The members of a wedding party have approached Imperial Jewelers about buying 24 of these gold bracelets for the discounted price of $367.00 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 $458 and that would increase the direct materials cost per bracelet by $5. 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, $6.00 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?
Direct materials $ 142 Direct labor 82 Manufacturing overhead 38 Unit product cost $ 262Explanation / Answer
Let’s compute new relevant cost per unit and relevant cost for this order.
Particulars
Per unit
for 24 bracelets
Direct Material
147
3528
Direct Labor
82
1968
Variable Manufacturing Overhead
6
144
Special Tool
458
Total relevant cost
6098
Solution A (Financial Advantage - $2710):
Company will receive a revenue of $367 per bracelet for 24 bracelets.
Total revenue= 8,808
Relevant cost for this order= $6,098
Financial Advantage = $8808 - $6074 = $2710
Solution B: Yes the company should accept the order since it will add an additional profit of $2,710.
Particulars
Per unit
for 24 bracelets
Direct Material
147
3528
Direct Labor
82
1968
Variable Manufacturing Overhead
6
144
Special Tool
458
Total relevant cost
6098
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