Ace Company manufactures two products called A and B that sell for $100 and $60
ID: 2467596 • 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:
Product
Direct Material
Variable Manufacturing Overhead
Traceable Fixed Overhead
Total Cost per Unit
Ace considers its traceable fixed manufacturing overhead to be avoidable, but its common fixed expenses are deemed unavoidable. The common fixed expenses have been allocated to products based on sales dollars.
Answer each question independently unless instructed otherwise.
Use an excel format to answer each question.
1. Assume that Ace expects to sell 80,000 units of B during the current year. One of Ace’s sales representatives has found a new customer that is will to buy 10,000 additional units of B for a price of $30 per unit. Because of the reduced selling price the variable selling expense will be one-half of the normal variable selling expense on this special order. In addition there will be an extra $1 per unit charge associated with this order. If Ace accepts this order how much will profits increase of decrease?
2. Refer to (1) above. Assume Ace is producing at capacity for B products and if Ace accepts the special order sales to regular customers will decrease by 10,000 units. If Ace accepts the order how much will profits increase or decrease?
3. Refer to (1) above. Assume that Ace will produce the extra 10,000 units and will not reduce sales to regular customers. Because Ace is now producing in excess of capacity (for just this order) some units costs associated with the special order will increase. These costs will increase by 20%. Which costs do you expect to increase? If Ace accepts the order how much will profits increase or decrease?
4. Refer to (3) above. Suppose Ace counter offers. What price should Ace propose to the customer if Ace wants to make a profit of $1.50 per unit?
A BDirect Material
25 10 Direct Labor 15 10Variable Manufacturing Overhead
10 5Traceable Fixed Overhead
15 10 Variable Selling Expenses 10 5 Common Fixed Overhead 15.62 9.38Total Cost per Unit
$90.62 $49.38Explanation / Answer
1) Selling price of Additional Order = $ 30
Variable cost per unit = Direct Material + Direct Labor + Variable Manufacturing OH + Variable selling + Additional Cost
= $10 + $ 10 + $ 5 + $ 2.5 + $ 1
= $ 28.5
So it gives the profit of $ 30 - 28.5 = $ 1.5 so proposal should be accepted.
2) if ace accepts the profit the Profits will decrease to the extent of $ 60 - 30 = $ 30 per unit
Ask other parts separately by mentioning the required part.