Imperial Jewelers Considering Special Order For 16 Hands ✓ Solved
Imperial Jewelers Is Considering A Special Order For 16 Handcrafted Go
Imperial Jewelers is considering a special order for 16 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $403.00 and its unit product cost is $266.00. The manufacturing overhead is mostly fixed, with $9 of variable overhead per bracelet. The customer requests a special filigree that will cost $8 additional per bracelet, and a one-time special tool costing $460. This order can be fulfilled without affecting regular sales or existing capacity.
The requirements are as follows:
1. Determine the effect on net operating income if a special price of $363 per bracelet is offered for this order, considering incremental revenues and costs.
2. Prepare a CVP (cost-volume-profit) graph for a dinner-dance event with details provided, from zero to 500 tickets sold.
3. Calculate the break-even point for the dinner-dance and determine the ticket price needed to break even if 250 persons attend.
4. Prepare a CVP graph for the event.
5. For the Barlow Company example, calculate the contribution margin per pound of raw material for each product, and decide which products to prioritize based on contribution margin per pound.
6. Determine the maximum price Barlow should pay for additional raw material if demand exceeds supply.
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Sample Paper For Above instruction
Analyzing the Impact of a Special Order on Profitability for Imperial Jewelers
The decision to accept a special order involves evaluating whether the incremental revenues from the order outweigh the incremental costs incurred. In the case of Imperial Jewelers, accepting an order for 16 handcrafted gold bracelets at a special price of $363 per bracelet requires detailed analysis. This analysis considers both variable and fixed costs, with an emphasis on incremental costs since the order does not affect the company’s regular sales or capacity utilization.
Revenue Analysis
The total incremental revenue from the special order is calculated by multiplying the special price by the number of units.
\[ \text{Incremental Revenue} = 16 \times 363 = \$5,808 \]
Cost Analysis
Variable costs per bracelet include direct materials ($149), direct labor ($80), manufacturing overhead ($37), and additional costs for filigree ($8). The fixed manufacturing overhead is unaffected at $9 per bracelet; thus, only variable overhead applies here. The total variable cost per bracelet becomes:
\[ \text{Variable Cost per Bracelet} = 149 + 80 + 37 + 8 = \$274 \]
Total variable costs for 16 bracelets:
\[ 16 \times 274 = \$4,384 \]
Additionally, the purchase of the special tool costing $460 is a fixed, one-time expense. Since it is a fixed cost, it is included in total incremental costs. Total incremental costs are:
\[ 4,384 + 460 = \$4,844 \]
Profitability Calculation
The incremental net operating income (loss) is:
\[ \text{Incremental Revenue} - \text{Total Incremental Costs} = 5,808 - 4,844 = \$964 \]
Since this is a positive amount, accepting the order would increase the company's profit by $964. The decision supports acceptance at this special price because it contributes positively to net income without affecting regular sales or capacity constraints.
Additional Considerations
It is crucial to note that only direct variable costs are relevant for this decision, as fixed costs are already sunk or unaffected. The increased income justifies accepting the order, especially since it makes use of existing capacity without impacting regular sales. The unique expense of the special tool (a fixed cost) is a necessary consideration but does not outweigh the contribution margin gained.
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Cost-Volume-Profit Analysis and Graphs for Hartford Symphony Guild Event
1. Break-even Point Calculation
The fixed costs for the event include band ($2,000), rental ($1,250), intermission entertainment ($2,000), and advertising ($600), totaling:
\[ 2000 + 1250 + 2000 + 600 = \$5,850 \]
Variable costs per person comprise dinner ($15) and favors & program ($7), totaling:
\[ 15 + 7 = \$22 \]
Each ticket sold generates revenue of $61. The contribution margin per ticket is:
\[ 61 - 22 = \$39 \]
To find the break-even point (BEP):
\[ \text{BEP (units)} = \frac{\text{Fixed Costs}}{\text{Contribution Margin per Ticket}} = \frac{5850}{39} \approx 150 \text{ persons} \]
2. Ticket Price to Break Even at 250 Attendees
To find the required ticket price:
\[
\text{Total Revenue} = \text{Fixed Costs} + \text{Variable Costs} \times \text{Number of Attendees}
\]
Let \( P \) be the required ticket price:
\[
P \times 250 = 5850 + (22 \times 250) \Rightarrow P \times 250 = 5850 + 5500 = 11,350
\]
\[
P = \frac{11350}{250} = \$45.40
\]
Therefore, to break even with 250 attendees, ticket price should be approximately $45.40.
3. CVP Graph Construction
The graph plots total sales revenue, fixed expenses, and total expenses from zero to 500 tickets. The endpoints are calculated based on the data:
- Total Revenue at 0 tickets: \$0; at 500 tickets: \( 500 \times \$61 = \$30,500 \)
- Fixed Expenses: \$5,850 (constant line)
- Total Expenses at 0 tickets: \$5,850; at 500 tickets: \$5,850 + (variable cost per person \(\times\) 500) = \$5,850 + (22 \(\times\) 500) = \$5,850 + \$11,000 = \$16,850
Plotting these points and connecting lines visually demonstrates the break-even point where total revenue intersects total expenses.
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Strategic Product Prioritization Based on Contribution Margin per Pound for Barlow Company
Barlow Company seeks to maximize contribution margin given limited raw material. The contribution margin per unit and per pound is calculated as follows. The raw material cost per pound is $8.
| Product | Selling Price | Variable Expenses | Contribution Margin Per Unit | Pounds of Material per Unit | Contribution Margin per Pound |
|---------|----------------|---------------------|------------------------------|------------------------------|------------------------------|
| A | $240 | $96 | $144 | \( \frac{149}{80} \) = 1.8625 | \( \frac{144}{1.8625} \approx \$77.33 \) |
| B | $360 | $180 | $180 | \( \frac{80}{80} \) = 1 | \( \frac{180}{1} = \$180 \) |
| C | $320 | $112 | $208 | \( \frac{149+8}{80} \) = 1.94375 | \( \frac{112}{1.94375} \approx \$57.60 \) |
Priority should be given to the product with the highest contribution margin per pound, which is Product B (\$180). Producing as many units of Product B as possible maximizes contribution margin per pound of scarce raw materials, especially given a 4,400-pound limit:
\[ 1 \times 4400 = 4400 \text{ units of B} \]
Total contribution from prioritizing B is:
\[ 180 \times 4400 = \$792,000 \]
Decision Recommendation:
The company should prioritize Product B, followed by Product A, then Product C, as this sequence maximizes overall profitability per unit of scarce raw material.
Maximum Willingness to Pay for Additional Raw Material
The maximum price is determined by the contribution margin per pound. Since the highest contribution margin per pound is \$180 (Product B), any additional pound should not exceed this value to maintain profitability.
Thus, the maximum price is approximately:
Maximum amount: \$180 per pound
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Conclusion
The analysis highlights the significance of incremental analysis, contribution margin per unit and per pound, and break-even calculations in managerial decision-making. Accepting the special order at the offered price boosts net operating income, while the CVP analyses for events guide strategic pricing and capacity planning. Effective prioritization of raw materials based on contribution margin per pound ensures maximum profitability, especially under resource constraints. These tools continue to be essential for managerial decisions in manufacturing and service industries.
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