Ace Fertilizer Company specializes in the manufacturing of lawn and garden fertilizer but has ventured into market
Question:
Ace Fertilizer Company specializes in the manufacturing of lawn and garden fertilizer but has ventured into market of the manufacturing special orders due the high profitability prospects. As the assistant director of manufacturing, Abby Conroy, CMA, is responsible for developing contracts for special order production requests, which includes a cost estimate based on Ace's "prescribed billing formula" and submitting the contracts for final approval (Kreuze & Langsam, 2009, p. 1). Per company policy, the contract price for a special order should be equal to the total cost of the special order, including direct and indirect costs, plus an 80 percent markup. Also, if specially ordered materials are required to fulfil a production request, Ace will bill the customer 3 for the entire cost of the specialty materials plus the cost to dispose any unused materials, unless the customer chooses to keep them which is rare. However, if at the time the initial order is signed by customer, other orders exist that will consume the unused materials, then Ace will prorate the cost of the specially ordered material among the special orders. Breeland Ltd placed a special order for a cleaning solvent used in its steel plating process that requires Ace to purchase a specialty acid ingredient, XO-1600, which comes in 50-gallon drum but only 40 gallons would be used. Breeland has no use for the remaining 10 gallons, which must be used within 20 days after opening, and there were no existing orders that would require the use of the excess materials during that time. Considering these factors, Abby prepared a price quote for Breeland to include the entire cost of the specialty material, which is $80,000 plus a $10,000 disposal cost. The next day at a family weekend get-together, George's brother Josh who regularly does business with Ace offered to buy the rest of the XO-1600 and planned to finalize the agreement in the coming week. As such, Abby suggested that they either delay the price quote for Breeland or send the original quote followed by a revised quote when Josh's order is finalized. However, George does not think that Abby should prorate the cost of XO-1600 among Breeland and Josh's special orders, and instead wants Abby to bill Breeland for the 50 gallons of the XO-1600 plus the disposal cost, and still bill Josh the prorated cost for 10 gallons plus all other costs related to his special order. This would result in double-billing for the 10 gallons of XO-1600 but it will allow the company to meet its monthly profit goal, which it otherwise would not mee if the costs were to be prorated. Abby is faced with an ethical dilemma and must decide which course of action to take amidst the pressures from George.
- Did Abby compute the cost of the Breeland Ltd. special order correctly? If not, how was her cost estimate and/or price determination flawed?
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