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Homework answers / question archive / Imperial Jewelers manufactures and sells a gold bracelet for $403
Imperial Jewelers manufactures and sells a gold bracelet for $403.00. The company's accounting system says that the unit product cost for this bracelet is $264.00 as shown below: Help Save & Ent $144 Direct materials Direct labor Manufacturing overhead Unit product cost 83 37 $264 The members of a wedding party have approached Imperial Jewelers about buying 14 of these gold bracelets for the discounted price of $363.00 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 $459 and that would increase the direct materials cost per bracelet by $6. 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, $7.00 of the overhead is variable with respect 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? Required Required 2 >
Part 1 –
First of all we need to calculate total variable cost per unit which incur if the special order is prepared.
|
Total Variable Cost per Unit |
Bracelet |
|
Direct materials ($144 + Increase 6) |
$150 |
|
Direct labor |
$83 |
|
Variable Manufacturing overhead |
$7 |
|
Total Relevant Unit Cost for Special Order |
$240 |
Calculation of Financial Advantage (disadvantage) of accepting special order
|
Total US$ |
|
|
Sales Revenue ($363 * 14) |
$5,082 |
|
Less: Variable Costs ($240* 14) |
($3,360) |
|
Less: Cost of Special tool |
($459) |
|
Financial advantage (increase in profit) from special order |
$1,263 |
Financial advantage $1,263
Part 2 –
Yes, the company should accept the special order.
Note – It is given in the question that company could fulfill special order by using its existing manufacturing capacity. There is no requirement to increase the capacity. Hence Fixed Costs is irrelevant in this decision making.
Note – Fixed Costs are unaffected as given in the question. Hence not considered in analyzing the advantage.
