Imperial Jewelers is considering a special order for 26 handcrafted gold bracele
ID: 2462556 • Letter: I
Question
Imperial Jewelers is considering a special order for 26 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 $261.00 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, $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 $457 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 $368.00 per bracelet is offered for this order? (Enter all amounts as positive values.)
Imperial Jewelers is considering a special order for 26 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 $261.00 as shown below:
Explanation / Answer
For decision making, fixed overheads are non relevant. So, only variable part of the manufacturing overhead is to be taken in decision making. The special tool is bought for this order only. So, it has to be included in the costs to determine the operating profit from the order.
Income statement for the order:
The special order will result in a profit of $2,611. So, it should be accepted at this price.
Quantity 26 Per unit Total Sales 368.00 9568 Less: Variable costs Direct materials 144.00 3744 Direct Labor 85.00 2210 Variable manufacturing overhead 11.00 286 Special material 10.00 260 Contribution 3068 Less: Fixed Cost 17.58 457 Profits 2611Related Questions
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