I would just like to confirm that my answers are correct to the questions.

Ferguson Equipment, Inc. manufactures custom-designed manufacturing equipment. Ferguson had recently received a request to manufacture 40 units of a specialized machine at a price lower than it normally accepts. Marketing manager Emily Dorr indicated that if the order were accepted at that price, the company could expect additional orders from the same customer; in fact, if the company could offer this price in the market generally, she believed that sales of this machine would increase by 50 percent.

Cleon Skowsen, president of Ferguson, was skeptical about accepting the order. The company had a policy not to accept any order that did not provide revenues at least equal to its full manufacturing cost plus 15 percent. The price offered was $2,100 per unit. However, before a final decision was made, Cleon decided to request information on the estimated cost per unit. He was concerned because the company was experiencing increased competition, and the number of new orders was dropping.

The costs of producing the specialized machine are as follows:

Direct materials $ 24,000

Direct labour 20,000

Overhead 37,000 *

Total $ 81,000

Units 40

Unit cost $ 2,025

* Overhead is currently allocated based on an expected volume of 400,000 direct labour hours.

The controllers office had recently researched the possibility of using activity-based multiple overhead rates instead of the single rate currently in use. The controller had promised more accurate product costing, and Cleon was curious about how this approach would affect the pricing of this particular machine. Within 24 hours, the controller had assembled the following data regarding overhead:

Overhead cost pools Costs

Depreciation, equipment $ 300,000

Power (machine usage) 500,000

Material handling 800,000

Rework costs 300,000

Scrap costs 640,000

Depreciation, building 500,000

Supervision (plant-wide) 200,000

Other plant-wide overhead 460,000

Total $ 3,700,000

Expected activity for selected cost drivers for the year are:

Machine hours 100,000

Kilowatt hours 100,000

Material moves 10,000

Units reworked 2,000

Units scrapped 1,000

Direct labour hours 400,000

The overhead rate for facility-level activities is based on direct labour hours.

Estimated data for the potential job, based on production of 40 units, are:

Direct materials $ 24,000

Direct labour (4,000 hours) $ 20,000

Number of machine hours 1,000

Number of kilowatt hours 1,000

Number of material moves 6

Number of units reworked 1

Number of units scrapped 3

Required:

Given the current allocation and normal operating conditions, would Ferguson Equipment accept the job? Support your answer with calculations.

Policy: full manufacturing cost plus 15%.... $2025 X 15%= $304 + $2025 = $2329

Ferguson would not accept the job due to the fact that it goes against its policy of full manufacturing cost plus 15%. Ferguson would have to get $2329 to accept the job if it was to follow its policy.

Prepare a schedule calculating the unit cost of the specialized machine using activity-based costing.

Cost pools	Cost drivers	rate	quantity	Total for 40
Dep, equip-300,000	Machine hrs 100,000	$3	1000	$3000
Power 500,000	Kilowatt hrs 100,000	$5	1000	$5000
Material handling 800,000	Material moves 10,000	$80	6	$480
Rework 300,000	Units reworked 2,000	$150	1	$150
Scrap 640,000	Units scrapped 1,000	$640	3	$1920
Supervision 200,000	Direct labour hrs 400,000	$0.5	4,000	$2000
				$56,550

$24,000 + $20,000 +$56,550 / 40 = $2514

These two costs are not factored in: Depreciation, building 500,000 & Other plant-wide overhead 460,000

Based on the ABC results, what course of action would you recommend for Ferguson Equipment regarding this order? Support your answer.

The cost of the product using ABC would be $2514 per unit which is greater than $2100 so just producing the product costs more than the company would like to buy it so if Ferguson was to take the contact they would be taking a loss for each unit as well as going against its policy of full manufacturing cost plus 15%.

Which method of overhead allocation would you recommend Ferguson use? Why? Give both pros and cons for your recommendation.

I would recommend Ferguson to use predetermined method instead of the ABC method the ABC

is more accurate but it is a great deal more expensive to implement and in this situation the results are the same so why incur the extra expense.