Ace Company manufactures two products called A and B that sell for $100 and $60
ID: 2470160 • 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.
If Ace accepts this order profit would be increase of $15,000 are as follows.
Details
Amount
Selling price
$ 30.00
Direct material
$ 10.00
Direct labor
$ 10.00
Variable manufacturing overhead
$ 5.00
Variable selling expenses ($5 *1/2)
$ 2.50
Extra charge
$ 1.00
Total variable cost
$ 28.50
Contribution per unit
$ 1.50
Number of units
10000
Total profit
$ 15,000.00
Therefore, if accepted the special order profit would be increased of $15,000.
2.
If Ace accepts the special order sales to regular customers will decrease by 10,000 units. If Ace accepts the order profits will be decrease amount of ($60 - $49.38 - $1.50) is $9.12 per unit, total profit of 10,000 units of $91,200 would be decreased.
3.
If accept the special order profit would be decreased by $42,000 are as follows
Details
Amount
Selling price
$ 30.00
Direct material ($10 *120%)
$ 12.00
Direct labor ($10 *120%)
$ 12.00
Variable manufacturing overhead ($ *120%)
$ 6.00
Variable selling expenses ($5 *1/2) *120%
$ 3.00
Extra charge ($1 *120%)
$ 1.20
Total variable cost
$ 34.20
Contribution per unit
$ (4.20)
Number of units
10000
Total profit
$ (42,000.00)
4.
If Ace makes a profit of $1.50, the price would be $30 when idle capacity has more than 10,000 units out of total capacity.
Details
Amount
Selling price
$ 30.00
Direct material
$ 10.00
Direct labor
$ 10.00
Variable manufacturing overhead
$ 5.00
Variable selling expenses ($5 *1/2)
$ 2.50
Extra charge
$ 1.00
Total variable cost
$ 28.50
Contribution per unit
$ 1.50
Number of units
10000
Total profit
$ 15,000.00