Miyamoto Jewelers is considering a special order for 24 handcrafted gold bracele
ID: 2351010 • Letter: M
Question
Miyamoto Jewelers is considering a special order for 24 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $404 and its unit product cost is $274 as shown below:
Direct materials $149
Direct labor $86
Manufacturing overhead $39
Unit product cost $274
Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $15 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 $14 per bracelet and would also require acquisition of a special tool costing $465 that would have no other use once the special order is completed. This order would have no effect on the company
Explanation / Answer
(a) 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? Total Marginal Cost of each bracelet is: Direct materials $149 Direct labor $86 Manufacturing overhead $39 Unit product cost $274 Total = $135.00 per unit Sales Price - Marginal Cost = $169.95 - $135.00 = $34.95 $34.95 X 20 = $699.00 That is the increase in Operating Income before accounting for the special tool that cost $250.00 $699.00 - $250.00 = $449.00 After accounting for the special tool, the company's Operating income would increase by $449.00 if they accept the order. (b) Should the special order be accepted at this price. yes or no? Yes, as they will increase their income by doing so.