Evaluating A Special Order At Miyamoto Jewelers

Evaluating A Special Order Lo 7 5miyamoto Jewelers Is

Question 11 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. The costs include direct materials, direct labor, and manufacturing overhead, most of which is fixed. The variable manufacturing overhead is $7 per bracelet. The special order would involve additional materials costing $6 per bracelet and a one-time acquisition of a specialized tool costing $465. This order would be fulfilled using existing capacity, with no impact on regular sales. The special price offered is $349.95 per bracelet. The question is: What effect would accepting this order have on the company's net operating income at this price, and should the order be accepted?

Paper For Above Instruction

In evaluating the profitability and strategic implications of accepting a special order, it is crucial to analyze the incremental costs and revenues associated with the order. The objective is to determine whether the order will increase or decrease the company’s net operating income, considering that the company is capable of fulfilling the order without affecting existing sales or operations.

First, let's consider the relevant costs. The unit selling price offered is $349.95 per bracelet, which is slightly below the normal selling price of $389.95. The variable costs per bracelet include direct materials ($143), direct labor ($86), and variable manufacturing overhead ($7), totaling $236. Adding the additional materials of $6 per bracelet for the special filigree results in variable costs of $242 per bracelet. The acquisition cost of the special tool ($465) is a fixed, one-time expense, which will be incurred regardless of whether the order is accepted; thus, it should be considered only in the total net impact analysis, not per unit. Since the order involves only 10 bracelets, the per-unit impact of the tool amortization is $46.50, but as the tool will have no other use, this cost is directly attributable to this special order.

The incremental revenue from the order is 10 bracelets × $349.95 = $3,499.50. The total variable costs for these 10 bracelets are 10 × $242 = $2,420. Therefore, the contribution margin from the order, excluding the tool cost, is $3,499.50 - $2,420 = $1,079.50. The additional tool cost of $465 reduces net profit by that amount, resulting in a net impact of $1,079.50 - $465 = $614.50.

Because the overall impact on net operating income is positive by $614.50, accepting this special order would increase the company's income. The order is profitable at the offered price, given the incremental costs and fixed costs are not impacted by the order due to existing capacity. Therefore, from a financial standpoint, the order should be accepted.

However, strategic considerations might also influence the decision. The order involves giving away a product as a gift, which could enhance relationships or brand recognition, thereby potentially leading to future sales. Conversely, accepting a price below standard can set a precedent or impact the perceived value of the product. Nonetheless, given the analysis, the immediate financial benefit exists, and the order should be accepted based on the positive contribution margin calculation.

Additional Considerations

It is essential to ensure that accepting this order does not interfere with regular sales or overall capacity constraints. The scenario specifies no effect on existing sales, so capacity is not a concern. Also, assessing whether this order aligns with the company's strategic goals is crucial. If the goal is to build goodwill or test new markets, accepting this order could be justified. If the primary objective is maximizing profit, the positive contribution margin indicates acceptance is preferable.

Conclusion

In conclusion, the acceptance of the special order at the offered price of $349.95 per bracelet is financially justified, as it results in a net increase in the company's operating income by approximately $614.50. Given the capacity and strategic considerations, the order should be accepted unless other qualitative factors suggest otherwise.

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