The Walter Jewelry Company produces a bracelet which normally sells for $79.95.

Question

The Walter Jewelry Company produces a bracelet which normally sells for $79.95. The company produces 1,500 units annually but has the capacity to produce 2,000 units. A special order for manufacturing and selling 200 bracelets at $49.95 has been received which would not disrupt current operations. Current costs for the bracelet are as follows:
Direct materials $17.00
Direct labor 14.50
Variable overhead 4.00
Fixed overhead 5.00
Total $40.50

In addition, the customer would like to add a monogram to each bracelet which would require an additional $2 per unit in additional labor costs and Walter Company would also have to purchase a piece of equipment to create the monogram which would cost $1,600. This equipment would not have any other uses.

With regard to this special order only:
Answer


incremental revenues will exceed incremental costs by $2,490.

incremental revenues will exceed incremental costs by $890.

incremental revenues will exceed incremental costs by $2,890

incremental revenues will exceed incremental costs by $1,290

Explanation / Answer

Total Relevant Variable Cost per unit for special order = 17 + 14.50 + 4.00 + 2 = 37.50

Discretionary Fixed cost for special order = $1600

Profit or loss from special order = (49.95-37.50)*200 - 1600 = $890

Answer:

incremental revenues will exceed incremental costs by $890.

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