Problem 1 - Relevant Costs (Special Orders) Gem Company manufactures several different styles of jewelry cases. Management estimates that during the upcoming third quarter of 2022 the company will be operating at 80% of normal capacity. Gem's manufacturing capabilities are limited with plant capacity under normal operations is 90,000 machine hours per year or 7,500 machine hours per month. The budgeted manufacturing overhead for 2022 is forecast to be $360,000 of which $216,000 is fixed. The cost data for the regular Gem jewelry case is as follows: Regular selling price: Costs: Direct materials: Direct labor: $18.00/ DLH producing 6 units per DLH Variable Manufacturing Overhead (0.25 machine hours/unit) $10.00/unit $2.50/unit Because Gem's management wishes to have higher utilization of plant capacity, the company will consider a special order. Gem has received special-order inquiries from two companies. The first special order is from PBJ, Inc., which would like to market a jewelry case similar to Gem's regular jewelry case. The PBJ jewelry case would be marketed under PBJ's own label. PBJ, Inc., has offered Gem $7.00 per jewelry case for 25,000 cases to be shipped by October 1, 2022. According to the specifications provided by PBJ, Inc., the special-order case requires less expensive direct materials which will cost $0.15 less per case. Management has estimated that the remaining costs, labor time, and machine time will be the same as for the Gem jewelry case. The estimated per-unit costs of the Rose jewelry case are as follows: Direct materials /unit /unit The second special order was submitted by the Rose Company for 10,000 jewelry cases at $8.75 per case. Like the PBJ cases, these jewelry cases would be marketed under the Rose label and have to be shipped by October 1, 2022. However, the Rose jewelry case is different from any jewelry case in the Gem line. Direct labor: $18.00/ DLH producing 5 units per DLH Variable Manufacturing Overhead (0.25 machine hours/unit) $3.25 /unit /unit In addition, Gem will incur $1,500 in additional setup costs and will have to purchase a $2,500 special device to manufacture these cases; this device will be discarded once the special order is completed. Gem will have the entire third quarter to work on the special orders. Management does not expect any repeat sales to be generated from the PBJ Inc. order but believes that Rose Company may place future orders. Required: You have been asked to analyze these special order orders. Provide both quantitative and qualitative reasons for your recommendations.

Problem 1 - Relevant Costs (Special Orders) Gem Company manufactures several different styles of jewelry cases. Management estimates that during the upcoming third quarter of 2022 the company will be operating at 80% of normal capacity. Gem's manufacturing capabilities are limited with plant capacity under normal operations is 90,000 machine hours per year or 7.500 machine hours per month. The budgeted manufacturing overhead for 2022 is forecast to be $360,000 of which $216,000 is fixed. The cost data for the regular Gem jewelry case is as follows: Regular selling price: Costs: Direct materials: Direct labor: $18.00/DLH producing 6 units per DLH $10.00/unit $2.50/unit /unit /unit Variable Manufacturing Overhead (0.25 machine hours/unit) Because Gem's management wishes to have higher utilization of plant capacity, the company will consider a special order. Gem has received special-order inquiries from two companies. The first special order is from PBJ, Inc., which would like to market a jewelry case similar to Gem's regular jewelry case. The PBJ jewelry case would be marketed under PBJ's own label. PBJ, Inc., has offered Gem $7.00 per jewelry case for 25,000 cases to be shipped by October 1, 2022. According to the specifications provided by PBJ, Inc., the special-order case requires less expensive direct materials which will cost $0.15 less per case. Management has estimated that the remaining costs, labor time, and machine time will be the same as for the Gem jewelry case. The second special order was submitted by the Rose Company for 10,000 jewelry cases at $8.75 per case. Like the PBJ cases, these jewelry cases would be marketed under the Rose label and have to be shipped by October 1, 2022. However, the Rose jewelry case is different from any jewelry case in the Gem line. The estimated per-unit costs of the Rose jewelry case are as follows: Direct materials Direct labor: $18.00/DLH producing 5 units per DLH Variable Manufacturing Overhead (0.25 machine hours/unit) $3.25 /unit /unit In addition, Gem will incur $1,500 in additional setup costs and will have to purchase a $2,500 special device to manufacture these cases; this device will be discarded once the special order is completed. Gem will have the entire third quarter to work on the special orders. Management does not expect any repeat sales to be generated from the PBJ Inc. order but believes that Rose Company may place future orders. Required: You have been asked to analyze these special order orders. Provide both quantitative and qualitative reasons for your recommendations.