Question

Imperial Jewelers manufactures and sells a gold bracelet for $189.95. The company's accounting system says that the unit product cost for this bracelet is $149.00 as shown below: Direct materials $ 84.00 Direct labor 45.00

Manufacturing overhead 20.00
Unit product cost $ 149.00
The members of a wedding party have approached Imperial Jewelers about buying 20 of these gold bracelets for the discounted price of $169.95 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 $250 and that would increase the direct materials cost per bracelet by $2.00 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, $4.00 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?

Answer 1

To determine the financial advantage or disadvantage of accepting the special order, calculate the total revenue and total cost. Compare the contribution margin of the special order to the company's average contribution margin to decide whether to accept the order. Consider the impact on the company's ability to produce and sell to other customers.

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 total revenue and total cost associated with the order. The total revenue can be calculated by multiplying the discounted price per bracelet ($169.95) by the number of bracelets (20). The total cost can be calculated by considering the direct materials, direct labor, manufacturing overhead, and the additional cost for the special tool. By subtracting the total cost from the total revenue, we can determine the financial advantage or disadvantage.

Next, we need to consider whether the company should accept the special order. One way to analyze this is by comparing the contribution margin of the special order to the company's average contribution margin. The contribution margin is calculated by subtracting the variable costs (direct materials, direct labor, and variable portion of overhead) from the selling price. If the contribution margin of the special order is greater than the company's average contribution margin, it may be beneficial to accept the order. Additionally, the company should also consider the impact of the special order on its ability to produce and sell to other customers.