Evaluating a Special Order Imperial Jewelers is considering a special order for

Question

Evaluating a Special Order Imperial Jewelers is considering a special order for 20 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $189.95 and its unit product cost is $149.(K) 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, $4.00 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 $2.00 per bracelet and would also require acquisition of a special tool costing $250 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. Required: 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? Should the special order be accepted at this price?

Explanation / Answer

Calculation of net income added by special order No.of bracelets Per unit in $ Total in $ Sales 20 169.95 3399 (-) Variable cost - Direct Material 86 1720 - Direct Labour 45 900 - Variable Mfg Overhead 4 80 Contribution Margin 699 Less : Traceable Tool cost 250 Net Income from special order 449 If company aceepts the special order at $169.95 per bracelet , it's net income would increase by $449.

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