Imperial Jewelers is considering a special order for 29 handcrafted gold bracele

Question

Imperial Jewelers is considering a special order for 29 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $409.00 and its unit product cost is $264.00 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, $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 $451 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.

What effect would accepting this order have on the company’s net operating income if a special price of $369.00 per bracelet is offered for this order? (Enter all amounts as positive values.)

Imperial Jewelers is considering a special order for 29 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $409.00 and its unit product cost is $264.00 as shown below:

Explanation / Answer

Total Marginal Cost of each bracelet is:

Direct materials                           $143.00
Direct labor                                   $86.00
Variable Portion of Mfg. O/H         $14.00
Additional Filigree Materials            $13.00

Total =                                            $256.00 per unit

Sales Price - Marginal Cost = $369.00 - $256.00 = $113.00

$113.00 X 29 = $3,277

That is the increase in Operating Income before accounting for the special tool that cost $250.00

$3,277 - $451 = $2,826

After accounting for the special tool, the company's Operating income would increase by $2,826 if they accept the order.

(b) Should the special order be accepted at this price. yes or no?

Yes, as those will increase their income.

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