Exercise 10-4 Evaluating a Special Order [LO4] Miyamoto Jewelers is considering
ID: 2381050 • Letter: E
Question
Exercise 10-4 Evaluating a Special Order [LO4]
Miyamoto Jewelers is considering a special order for 23 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $408 and its unit product cost is $272 as shown below:
Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $11 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 $10 per bracelet and would also require acquisition of a special tool costing $459 that would have no other use once the special order is completed. This order would have no effect on the company
Miyamoto Jewelers is considering a special order for 23 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $408 and its unit product cost is $272 as shown below:
Evaluating a Special OrderExplanation / Answer
(a) What effect would accepting this order have on the company's net operating income if a special price of $169.95 per bracelet is offered for this order?
Total Marginal Cost of each bracelet is:
Direct materials $84.00
Direct labor $45.00
Variable Portion of Mfg. O/H $4.00
Additional Filigree Materials $2.00
Total = $135.00 per unit
Sales Price - Marginal Cost = $169.95 - $135.00 = $34.95
$34.95 X 20 = $699.00
That is the increase in Operating Income before accounting for the special tool that cost $250.00
$699.00 - $250.00 = $449.00
After accounting for the special tool, the company's Operating income would increase by $449.00 if they accept the order.
(b) Should the special order be accepted at this price. yes or no?
Yes, as they will increase their income by doing so.
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