The following budget information for the year ending December 31, 2006, pertains to Rust Manufacturing Company's operations:

The following information is also provided:
1. Rust has no beginning inventory. Production is planned so that it will equal the number of units sold.
2. The cost of direct labor is \(\$ 5\) per hour.
3. Depreciation and rent are fixed costs within the relevant range of production. Additional costs would be incurred for extra machinery and factory space if production is increased beyond current available capacity.
4. Rust allocates depreciation proportional to machinery use and rent proportional to factory space. Budgeted usage is as follows:

5. Other manufacturing support costs include variable costs equal to \(10 \%\) of direct labor cost and also include various fixed costs. None of the miscellaneous capacity-related fixed manufacturing support costs depend on the level of activity, although support costs attributable to a specific product are avoidable if that product's production ceases. Other manufacturing support costs are allocated between Ace and Bell on the basis of a percentage of budgeted direct labor cost.
6. Rust's selling and general administrative costs are committed in the intermediate term.
7. Rust allocates selling costs on the basis of a number of units sold at Ace and Bell.
8. Rust allocates general and administrative costs on the basis of sales revenue.
Required

a. Prepare a schedule, using separate columns for Ace and Bell, showing budgeted sales, variable costs, contribution margin, fixed costs, and pretax operating profit for the year ending December 31, 2006.

b. Calculate the contribution margin per unit and the pretax operating profit per unit for Ace and for Bell.

c. Calculate the effect on pretax operating profit resulting from a \(10 \%\) decrease in sales and production of each product.

d. What may be a problem with the above analysis?

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PRODUCT BUDGET ITEM ACE BELL TOTAL COSTS Budgeted sales in units 200,000 100,000 Selling price per unit $40 $20 Direct materials cost per unit $8 $3 Direct labor hours per unit 2 1 Depreciation $200,000 Rent $130,000 Other manufacturing support costs $500,000 Selling costs General and administrative costs $180,000 $40,000