Imperial Jewelers is considering a special order for 28 handcrafted gold bracele

Question

Imperial Jewelers is considering a special order for 28 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $406.00 and its unit product cost is $262.00 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 $454 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 $366.00 per bracelet is offered for this order? (Enter all amounts as positive values.)

                                  Per              Total 28

                                 unit               bracelets

                                                       

Incremental revenue

incremental costs:

variable costs:

direct materials

direct labor

variable manufacturing overhead

special filigree

total variable cost   $0                          0

fixed costs:

purchase of special tool

total incremental cost                                               0

incremental net operating income (loss)                    $0

  Direct materials $ 148       Direct labor 82       Manufacturing overhead 32       Unit product cost $ 262    

Explanation / Answer

Total 28

bracelets

                                                       

Incremental revenue 366*28 = 10,248.00

incremental costs:

variable costs:

direct materials 28 * 148 = 4.144.00

direct labor 28 * 82 = 2,296.00

variable manufacturing overhead 28*14 = 392.00

special filigree 28*13 = 364.00   

fixed costs: = 454.00

purchase of special tool

total incremental cost

incremental net operating income (loss)                    $2,598.00

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