Optimizing Profit: Special Order Analysis for Imperial Jewelers
1. What is the financial advantage (disadvantage) of accepting the special order from the wedding party?
Should the company accept the special order?
Financial Advantage of Accepting Special Order
The financial advantage of accepting the special order is $2,338. This is calculated as follows: (21 bracelets * $7 increase in direct materials) + $458 special tool cost - ($8 variable overhead per bracelet * 21 bracelets) = $2,338.
Should the company accept the special order?
Yes, the company should accept the special order because the financial advantage is positive. This means that the company would make more money by accepting the special order than by not accepting it.
Imperial Jewelers manufactures and sells a gold bracelet for $404.00, with a unit product cost of $269.00. The company has been approached by a wedding party to purchase 21 bracelets at a discounted price of $364.00 each, with additional special filigree applied to each bracelet. This would require purchasing a special tool for $458 and increasing the direct materials cost by $7 per bracelet.
Upon analysis, the financial advantage of accepting the special order is determined to be $2,338. This is achieved through the increase in direct materials cost, the special tool cost, and the consideration of variable overhead costs. While there is a lost contribution margin on the 21 bracelets, the overall advantage remains at $1,585.
The company should accept the special order due to the positive financial advantage. This decision is supported by the fact that accepting the order would not impact the company's ability to fulfill orders from other customers or strain its manufacturing capacity.