Question

Imperial Jewelers manufactures and sells a gold bracelet for $407.00. The company’s accounting system says that the unit product cost for this bracelet is $276.00 as shown below:

Direct materials $ 150
Direct labor 90
Manufacturing overhead 36
Unit product cost $ 276


The members of a wedding party have approached Imperial Jewelers about buying 24 of these gold bracelets for the discounted price of $367.00 each. The members of the wedding party would like special filigree applied to the bracelets that would increase the direct materials cost per bracelet by $6. Imperial Jewelers would also have to buy a special tool for $466 to apply the filigree to the bracelets. 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?

What is the financial advantage (disadvantage) of accepting the special order from the wedding party?

Answer 1

The financial advantage (disadvantage) of accepting the special order is a disadvantage of $9,144.00. The company should not accept the order.

Step-by-step explanation:

To determine the financial advantage or disadvantage of accepting the special order from the wedding party, we need to calculate the additional costs and revenue associated with the order.

Step 1: Calculate the additional direct materials cost per bracelet: $6.00

Step 2: Calculate the additional cost for the special tool: $466.00

Step 3: Calculate the total additional cost per bracelet: $6.00 direct materials cost + $466.00 special tool cost = $472.00

Step 4: Calculate the total cost per bracelet with the additional costs: $276.00 unit product cost + $472.00 total additional cost = $748.00

Step 5: Calculate the total revenue from selling 24 bracelets at the discounted price: $367.00 discounted price x 24 bracelets = $8,808.00

Step 6: Calculate the financial advantage (disadvantage): Total revenue - Total cost = $8,808.00 - ($748.00 x 24 bracelets) = $8,808.00 - $17,952.00 = -$9,144.00

The financial advantage (disadvantage) of accepting the special order from the wedding party is a disadvantage of -$9,144.00.

Considering the negative financial impact of accepting the special order, the company should not accept the order.