Sato Jewellers has had a request for a special order for 10 gold bangles for the...

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Sato Jewellers has had a request for a special order for 10 goldbangles for the members of a wedding party. The normal sellingprice of a gold bangle is $394.50 and its unit product cost is$263.00, as shown below:
  Direct materials $ 151.00
  Direct labour 94.00
  Manufacturing overhead 18.00
  Unit product cost $ 263.00

Most of the manufacturing overhead is fixed and unaffected byvariations in how much jewellery is produced in any given period.However, $3 of the overhead is variable, depending on the number ofbangles produced. The customer would like special filigree appliedto the bangles. This filigree would require additional materialscosting $2 per bangle and would also require acquisition of aspecial tool costing $555 that would have no other use once thespecial order was completed. This order would have no effect on thecompany’s regular sales, and the order could be filled using thecompany’s existing capacity without affecting any other order.

Required:
a.What effect would accepting this order have on thecompany’s operating income if a special price of $354.50 is offeredper bangle for this order? (Do not round intermediatecalculations. Round your answer to 2 decimal places.

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3.6 Ratings (546 Votes)

Solution

Financial advantage

$ 490.00

Working

	Per	Total 10
	Unit	Bangles
Incremental revenue	$ 354.50	$ 3,545.00
Incremental cost:
Variable cost
Direct material	$ 151.00	$ 1,510.00
Direct labor	$ 94.00	$ 940.00
Variable manufacturing cost	$ 3.00	$ 30.00
Cost of special filigree	$ 2.00	$ 20.00
Total variable cost	$ 250.00	$ 2,500.00
Fixed cost:
Purchase of special tool		$ 555.00
Total incremental cost		$ 3,055.00
Incremental net Operating income (loss)		$ 490.00

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Transcribed Image Text

Sato Jewellers has had a request for a special order for 10 goldbangles for the members of a wedding party. The normal sellingprice of a gold bangle is $394.50 and its unit product cost is$263.00, as shown below: Direct materials$151.00 Direct labour94.00 Manufacturing overhead18.00 Unit product cost$263.00Most of the manufacturing overhead is fixed and unaffected byvariations in how much jewellery is produced in any given period.However, $3 of the overhead is variable, depending on the number ofbangles produced. The customer would like special filigree appliedto the bangles. This filigree would require additional materialscosting $2 per bangle and would also require acquisition of aspecial tool costing $555 that would have no other use once thespecial order was completed. This order would have no effect on thecompany’s regular sales, and the order could be filled using thecompany’s existing capacity without affecting any other order.Required:a.What effect would accepting this order have on thecompany’s operating income if a special price of $354.50 is offeredper bangle for this order? (Do not round intermediatecalculations. Round your answer to 2 decimal places.


Direct materials	$	151.00
Direct labour		94.00
Manufacturing overhead		18.00

Unit product cost	$	263.00