Problem:
The Walter Jewelry Company produces a bracelet which normally sells for $79.95. The company produces 1,500 units annually but has the capacity to produce 2,000 units. A special order for manufacturing and selling 200 bracelets at $49.95 has been received which would not disrupt current operations. Current costs for the bracelet are as follows:
Direct materials $17.00
Direct labor 14.50
Variable overhead 4.00
Fixed overhead 5.00
Total $40.50
In addition, the customer would like to add a monogram to each bracelet which would require an additional $2 per unit in additional labor costs and Walter Company would also have to purchase a piece of equipment to create the monogram which would cost $1,600. This equipment would not have any other uses.
With regard to this special order only:
A. incremental revenues will exceed incremental costs by $2,490.
B. incremental revenues will exceed incremental costs by $890.
C. incremental revenues will exceed incremental costs by $2,890
D. incremental revenues will exceed incremental costs by $1,290