Evaluating A Special Order - Miyamoto Jewelers

Evaluating a special order (LO – 7-5) Miyamoto Jewelers Is

Questions related to evaluating a special order for Miyamoto Jewelers, including the financial impact on net operating income, the acceptability of the price, and considerations for decision-making.

Paper For Above instruction

Introduction

Businesses frequently encounter situations where they must decide whether to accept special orders that are outside their normal sales channels. The decision involves analyzing the financial impact of accepting such orders, considering relevant costs, capacity constraints, and potential effects on regular sales. This paper explores the evaluation of a special order at Miyamoto Jewelers, focusing on whether accepting an order for handcrafted gold bracelets at a discounted price is financially justifiable, and discusses the broader implications of such decisions through relevant managerial accounting concepts.

Background of Miyamoto Jewelers and the Special Order

Miyamoto Jewelers is contemplating accepting a special order for 10 handcrafted gold bracelets, intended as gifts for a wedding party. The normal selling price per bracelet is $389.95, with a unit product cost of $264. The product cost comprises direct materials ($143), direct labor ($86), and manufacturing overhead ($35), with most overhead being fixed and unaffected by production volume, except for $7 variable overhead per unit. The special order would involve applying additional filigree, increasing material costs by $6 per bracelet, and incurring a one-time acquisition cost for a special tool ($465). Importantly, fulfilling this order would not interfere with the company’s existing capacity or regular sales, implying no opportunity cost in terms of lost sales or increased capacity constraints.

Financial Analysis of the Special Order

The company proposes a special price of $349.95 per bracelet for this order. To analyze the net impact on operating income, it is essential to consider incremental revenues and costs directly attributable to this order. The total revenue from the special order would be:

Revenue = 10 bracelets x $349.95 = $3,499.50

Incremental costs include direct materials, additional materials for filigree, and the special tooling. The direct material cost per bracelet is $143, with an extra $6 for filigree, totaling $149 per unit. The direct labor cost remains unchanged at $86 per bracelet, assuming the existing capacity allows for the additional production without extra labor costs (as per the problem statement). The variable manufacturing overhead of $7 per bracelet applies, totaling $70 for 10 bracelets. The fixed overhead costs are unaffected and thus are irrelevant to this decision. The special tooling cost of $465 is a fixed, one-time expense and should be amortized over the number of units; however, since only 10 units are involved, treating it as a direct expense in this context is reasonable.

Calculations:

  • Incremental revenue: $3,499.50
  • Incremental costs:
    • Materials: 10 x $149 = $1,490
    • Labor: 10 x $86 = $860
    • Variable overhead: 10 x $7 = $70
    • Special tool: $465
  • Total incremental costs: $1,490 + $860 + $70 + $465 = $2,885

Net operating income change:

Revenues - Costs = $3,499.50 - $2,885 = $614.50

This indicates that accepting the special order would increase net operating income by approximately $614.50, implying a favorable impact on profitability.

Decision-Making and Recommendations

Given that the special order would result in an increase in net operating income, and the company has sufficient capacity to fulfill it without affecting normal sales, accepting the order at $349.95 per bracelet appears financially advantageous. However, managers should also consider qualitative factors such as the potential for future business relationships and the strategic positioning of offering customized products.

Furthermore, the analysis assumes that the allocated fixed overhead costs are truly fixed and unaffected by the order, which aligns with managerial accounting principles that only relevant costs should influence such decisions (Drury, 2018). The contribution margin per unit in this case effectively measures the incremental profitability of the order, emphasizing the importance of variable costs and relevant fixed costs in special order decisions (Garrison, Noreen, & Brewer, 2018).

Conclusion

In conclusion, accepting the special order at the proposed price of $349.95 per bracelet would positively impact Miyamoto Jewelers’ net operating income by approximately $615. The decision aligns with relevant cost principles and capacity considerations, suggesting that the order should be accepted if the company seeks to enhance profitability without jeopardizing existing operations. Careful evaluation of both quantitative and qualitative factors remains essential to make fully informed managerial decisions in such scenarios.

References

  • Drury, C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning.
  • Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting (16th ed.). McGraw-Hill Education.
  • Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2014). Introduction to Management Accounting (16th ed.). Pearson.
  • Kaplan, R. S., & Atkinson, A. A. (2015). Advanced Management Accounting (3rd ed.). Pearson.
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Managerial Accounting: Tools for Business Decision Making (9th ed.). Wiley.
  • Garrison, Noreen, & Brewer. (2018). Managerial Accounting (16th ed.). McGraw-Hill Education.
  • Anthony, R. N., & Govindarajan, V. (2014). Management Control Systems (13th ed.). McGraw-Hill Education.
  • McManus, R. C. (2017). Cost Accounting: A Managerial Emphasis. Pearson.
  • Hilton, R. W., & Platt, D. E. (2016). Managerial Accounting: Creating Value in a Dynamic Business Environment. McGraw-Hill Education.
  • Siegel, G., & Shim, J. K. (2014). Financial Management and Accounting for Managers. Barrons Educational Series.

Related Assignments