CASE STYDY Ace Fertilizer Company

Abby has received a request from Breeland Ltd. to produce a unique, somewhat unstable cleaning solvent for use in Breelands specialized steel plating process. Ace Fertilizer is one of only a handful of companies across the country capable of producing such a solvent. The customer has a limited need for this solvent, and does not foresee requiring quantities of it beyond this special order. To produce this substance, Abby must purchase a specialty acid ingredient known as XO-1600. That substance is only available in 50-gallon drums. The 50-gallon drum costs $80,000. This special order will only require the use of 40 gallons. XO-1600 has a shelf life of only 20 days after the drum is opened. After those 20 days, the substance becomes very unstable and must be discarded. Because of the chemical nature of the substance, it requires proper disposal. Abby estimates the cost of this disposal at $10,000. Abby has checked existing, confirmed orders and found none that will require XO-1600 within the next 20 days. Inquiries with representatives at Breeland Ltd. reveal that they have no interest in taking possession of the unused gallons. Abby also determines that several other costs and activities will be associated with the completion of the special order for the solvent. These costs and activities are: 1. Direct materials, in addition to XO-1600: $20,000. 2. Direct labor: $30,000. 3. Unit measure of special order: 4,000 gallons. 4. Number of batches for production: 4 (due to constraints during the mixing process). Using ABC at the beginning of the costing period, Abby arrives at the following costs for each of the five activity measures: a. Unit-level activities: $40 per unit of measure. b. Batch-level activities: $5,000 per batch. c. Product-level activities: $80,000 per project. d. Customer-related activities: $30,000 per customer. e. Organization-sustaining activities: 100% of direct materials, direct labor, unit-level activity costs, and batch-level activity costs.

Toward the end of the day on Friday, Abby works up the following cost estimate and price determination for this special order: Direct materials:

Non-XO-1600 $ 20,000

XO-1600: Purchase cost 80,000

Disposal cost 10,000

Direct labor 30,000

Unit-level activity cost ($40 * 4,000 gallons) 160,000

Batch-level activity cost ($5,000 * 4 batches) 20,000

Product-level activity cost 80,000

Customer-level activity cost 30,000

Organization-sustaining level activity cost (20,000+80,000+10,000+30,000+160,000+20,000) 320,000

Total costs of Breeland Ltd. special order $ 750,000

Markup on cost ($750,000/.80) 900,000

Total price Determination for Breeland Ltd. Order $1,650,000

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The Questions::

1. Did Abby compute the cost of the Breeland Ltd. special order correctly before the weekend get-together? If not, how was her cost estimate and/or price determination flawed? 2. Whose assessment of the costing of this special order do you believe is correctGeorge Smilees or Abby Conroys? That is, should Georges conversations with Josh impact Abbys cost estimate of the Breeland Ltd. special order? Explain your answer. 3. Are there any ethical issues related to the cost determination on the Breeland Ltd. special order? If so, what issues are present? How should Abby resolve these conflicts? Should Abby go directly to Tom Brennen about this new development? How can Abby use the IMA Statement of Ethical Professional Practice as a guide for her actions? 4. If Abby were to modify her original cost estimate of the Breeland Ltd. special order to include Joshs purchase of the remaining 10 gallons of XO-1600, what price determination would she have arrived at? What impact would that have had on Ace Fertilizers bottom line?