Question

Exercise 10-4 Evaluating a Special Order [LO10-4] Imperial Jewelers is considering a special order for 22 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $408.00 and its unit product cost is $262.00 as shown below:

Direct materials $ 141

Direct labor 87

Manufacturing overhead 34

Unit product cost $ 262

Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $14 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 $13 per bracelet and would also require acquisition of a special tool costing $460 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 $368.00 per bracelet is offered for this order? (Enter all amounts as positive values.)

Note: Per Unit and Total 24 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)

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