Exercise 10-4 Evaluating a Special Order [L010-4] Imperial Jewelers is consideri

Question

Exercise 10-4 Evaluating a Special Order [L010-4] Imperial Jewelers is considering a special order for 13 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 $269.00 as shown below: Direct materials Direct labor Manufacturing overhead $144 86 39 Unit product cost $269 Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $5 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 $4 per bracelet and would also require acquisition of a special tool costing $468 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.

Explanation / Answer

Incremental analysis :

Per unit Total Incremental revenue 366 4758 Incremental cost Variable cost Direct material 144 1872 Direct labour 86 1118 Variable manufacturing overhead 5 65 Special filigree 4 52 Total variable cost 3107 Fixed cost Purchase of special tool 468 Total incremental cost 3575 Incremental net operating income (loss) 1183

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