Evaluating a special order (LO – 7-5)

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 as shown below.

Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period.  However, $7 of the overhead is variable with respect to the number of bracelets produced.  The customer who is interested in the special bracelet order would like special filigree applied to the bracelets.  This filigree would require additional material 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 the order 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?

QUESTION 2

Uncertain Future Cash Flows (LO – 8-3)

Union Bay Plastics is investigating the purchase of automated equipment that would save $100,000 each year in direct labor and inventory carrying costs.  This equipment costs $750,000 and is expected to have a 10-year useful lift with no salvage value.  The company’s required rate of return is 15% on all equipment purchases.  This equipment would provide intangible benefits such as greater flexibility and higher-quality output that are difficult to estimate and yet are quite significant.

 
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