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…………………. $149.00The 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.
1. What is the financial advantage (disadvantage) of accepting the special order from the wedding party?
2. Should the company accept the special order?