Ace Company manufactures two products called A and B that sell for $100 and $60
ID: 2463378 • Letter: A
Question
Ace Company manufactures two products called A and B that sell for $100 and $60 respectively. Each product uses only one type of raw material that cost $5 per pound. Ace has the capacity to annually produce 100,000 units of each product. The unit cost for each product at this level of capacity is given below: Are considers its traceable fixed manufacturing overhead to be avoidable, but its common fixed expenses are deemed un avoidable and have been allocated to products based on sales dollars. What is the contribution margin of each product? Assume that Ace uses the absorption method to compute product cost. What is the gross margin per unit of each product? What contribution margin per pound of raw material is earned by each product? What is the total traceable fixed overhead cost incurred by Ace Company? What is the total common fixed expense incurred by Ace Company? Assume that Ace expects to produce and sell 75,000 units of A during the current year. A supplier has offered to manufacture and deliver 75,000 units of A for a price of $68. If Ace accepts this offer instead of manufacturing those units how much will profits increase?/decrease? Assume that Ace expects to produce and sell 60,000 of product A during the current year. A supplier has offered to manufacture and deliver 60,000 units of A for a price of $80 each. If Ace accepts the offer how much will profits increase/decrease? Using the information in 7 above, assume the space used for producing product A can be used to produce a contribution margin of $50,000. If Ace chooses this action how much will profit increase ?/decrease.Explanation / Answer
5. Total common fixed expenses incurred by Ace Company = $15.63 x 100,000 + $ 9.375 x 100,000 =$ 2,500,500
6. Make or Outsource ( 75,000 units) :
If the offer is accepted, Profit will increase by $ ( 6,000,000 - 5,100,000) = $ 900,000
7. Make / Outsource ( 60,000 units) :
If Ace Company accepts the offer, profit will increase by $ ( 5,100,000 - 4,800,000) = $ 300,000
8. The profit will increase by $ 350,000.
Make Product A Outsource Product A Total variable cost of making ( $ 60 x 75,000) $ 4,500,000 Avoidable fixed overhead cost $ 1,500,000 Purchase cost ( $ 68 x 75,000) $ 5,100,000 Total cost $ 6,000,000 $ 5,100,000