Chapter 12 Problem 2

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 A B Direct Material 25 10 Direct Labor 15 10 Variable Manufacturing Overhead 10 5 Traceable Fixed Overhead 15 10 Variable Selling expenses 10 5 Common Fixed Overhead 15.62 9.38 Total Cost per Unit $90.62 $49.38 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.

1. Assume that Ace expects to sell 80,000 units of B during the current year. One of Aces 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?