Question

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 increase the direct materials cost per bracelet by $8. Imperial Jewelers would also have to buy a special tool for $461 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, $12.00 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 partyâs order using its existing manufacturing capacity.

Required:
a. What is the financial advantage (disadvantage) of accepting the special order from the wedding party?
b. Should the company accept the special order?

Answer 1

answers:

the financial advantage = 4,341 dollars

given that  there is an advantage, then the project has to be accepted.

Explanation:

total incremental revenue from the 14 bracelets = 14 x 363 = $5082

direct material = 8 x 14 = 112

overhead = 12 x 14 = 168

we have the additional expense for this tool to be 461 dollars

for the special filigree that is to be attached to this bracelet e have

112 + 168 + 461 = $741

a. the financial advantage of accepting this = 5082 - 741 = 4341 dollars

b. given that there is a financial advantage then it is better that this order is accepted.