Evaluating a special order and its impact on the company's income.
Miyamoto Jewelers is considering a special order for 10 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $389.95 and its unit product cost is $264.00 as shown below:
|
Direct materials...............
|
$143.00
|
|
Direct labor....................
|
86.00
|
|
Manufacturing overhead...
|
35.00
|
|
Unit product cost............
|
$264.00
|
Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is product in any given period. However, $7 of the overhead is variable with respect to the number if bracelets produced. The customer who is interested in special bracelet order would like special filigree applied to the bracelets. This filigree would require additional materials costing $6 per bracelet and would also require acquisition of a special tool costing $465 that would have no other use once the special order is completed. This order would have no effect on the company's regular sales and other could be fulfilled using the company's existing capacity without affecting any other order.
Required:
What effect would accepting this order have on the company's net operating income if a special price of $349.95 is offered per bracelet for this order? Should the special order be accepted at this price?