Imperial Jewelers manufactures and sells a gold bracelet for $405.00. The compan

Question

Imperial Jewelers manufactures and sells a gold bracelet for $405.00. The company’s accounting system says that the unit product cost for this bracelet is $257.00 as shown below:

The members of a wedding party have approached Imperial Jewelers about buying 26 of these gold bracelets for the discounted price of $365.00 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 $466 and that would increase the direct materials cost per bracelet by $10. 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, $11.00 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 $ 146 Direct labor 81 Manufacturing overhead 30 Unit product cost $ 257

Explanation / Answer

1. Following are the relevant cost for the special order :

Direct Material = $ 156 ($10 extra material cost incurred for special filigree)

Direct Labour = $ 81

Variable Overhead = $ 11

Total Variable cost is $248 (156+81+11)

Profit on special order is :

26 bracelete*($365-$248)-$466

26*117-466

3042-466

$2576

On accepting order company get profit of $2576.

2.) Company should accept the order because its does not affects other customers and increase the company profit by $2576.

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