Check my wo Imperial Jewelers manufactures and sells a gold bracelet for $406.00
ID: 2431768 • Letter: C
Question
Check my wo Imperial Jewelers manufactures and sells a gold bracelet for $406.00. The company's accounting cost for this bracelet is $261.00 as shown below Direet materials Direct labor Manufacturing overhead Unit product cost $148 82 31 $261 The members of a wedding party have approached Imperial Jewelers about buying 16 of these gold bracelets for the discounted price of $366.00 each. The members of the wedding party would like special filigree applied to the bracelets that would require Imperial Jewelers to buy a special tool for $451 and that would increase the direct materials cost per bracelet by $8. The special tool would have no other use once the special order is completed To analyze this special order opportunity, Imperial Jewelers has determined that most of its manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $9.00 of the overhead is variable with respec to the number of bracelets produced. The company also believes that accepting this order would have no effect on its ability to produce and sell jewelry to other customers. Furthermore, the company could fulfill the wedding party's order using its existing manufacturing capacity. Required 1. What is the financial advantage (disadvantage) of accepting the special order from the wedding party? 2. Should the company accept the special order? Complete this question by entering your answers in the tabs below Required 1 Required 2 What is the financial advantage (disadvantage) of accepting the special order from the wedding party?Explanation / Answer
Ans)
Only the incremental costs and benefits are relevant. In particular, only the variable manufacturing overhead and the cost of the special tool are relevant overhead costs in this situation. The other manufacturing overhead costs are fixed and are not affected by the decision.
Per Unit Total for 16 Bracelets
Incremental revenue..................................................$366 5856
Incremental costs:
Variable costs:
Direct materials.................................................. 148 2368
Direct labor........................................................ 82 1312
Variable manufacturing overhead...................... 9 144
Special filigree................................................... 8 128
Total variable cost.................................................. 247 3952
Fixed costs:Purchase of special tool.......................... 451
Total incremental cost.............................................. 4403
Incremental net operating income............................ 1453
Even though the price for the special order is below the company's regular price for such an item,the special order would add to the company's net operating income and should be accepted. This conclusion would not necessarily follow if the special order affected the regular selling price of bracelets or if it required the use of a constrained resource.