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 $405.00 and its unit product cost is $275.00 as shown below:
Direct materials $ 149 Direct labor 88 Manufacturing overhead 38 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, $5 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 $4 per bracelet and would also require acquisition of a special tool costing $468 that would have no other use once the special order is completed. This order would have no effect on the companyâs regular sales and the order could be fulfilled using the companyâs existing capacity without affecting any other order.
Required:
What effect would accepting this order have on the companyâs net operating income if a special price of $365.00 per bracelet is offered for this order?
| 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 $405.00 and its unit product cost is $275.00 as shown below: |
| Direct materials | $ | 149 | |
| Direct labor | 88 | ||
| Manufacturing overhead | 38 | ||
| 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, $5 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 $4 per bracelet and would also require acquisition of a special tool costing $468 that would have no other use once the special order is completed. This order would have no effect on the companyâs regular sales and the order could be fulfilled using the companyâs existing capacity without affecting any other order. |
| Required: |
| What effect would accepting this order have on the companyâs net operating income if a special price of $365.00 per bracelet is offered for this order? |
Related questions
Imperial Jewelers manufactures and sells a gold bracelet for $405.00. The companyâs accounting system says that the unit product cost for this bracelet is $268.00 as shown below:
| Direct materials | $ | 149 | |
| Direct labor | 85 | ||
| Manufacturing overhead | 34 | ||
| Unit product cost | $ | 268 | |
The members of a wedding party have approached Imperial Jewelers about buying 24 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 $459 and that would increase the direct materials cost per bracelet by $14. 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, $15.00 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 partyâs 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?
Imperial Jewelers is considering a special order for 23handcrafted gold bracelets to be given as gifts to members of awedding 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 | $149 |
| Direct labor | $87 |
| Manufacturing Overhead | $39 |
| Unit Product cost | $275 |
Most of the manufacturing overhead is fixed and unaffected byvariations in how much jewelry is produced in any given period.However, $11 of the overhead is variable with respectto the numberof bracelets produced. The customer who is interested in thespecial bracelet order would like special filigree applied to thebracelets. This filigree would require additional materials costing$10 per bracelet and would also require acquisition of a specialtool costing $452 that would have no other use once the specialorder is completed. This order would have no effect on thecompanyâs regular sales and the order could be fulfilled using thecompanyâs existing capacity without affecting any other order.
Required:
What effect would accepting this order have on the companyâs netoperating income if a special price of $367.00 per bracelet isoffered for this order?
Per unit | Total 23 bracelets | |
Incremental revenue | ||
Incremental costs | ||
Variable costs: | ||
Direct materials | ||
Direct labor | ||
Variable manufacturing overhead | ||
Special filigree | ||
Total variable cost | ||
Fixed costs: | ||
Purchase of special tool | ||
Total incremental cost | ||
Incremental net operating income (loss) |
Should the special order be accepted at this price?
Yes
No
