Problem 1 - Chapter 5

Acme Automaker manufactures fuel rails for various engine applications. Currently, Acme has capacity to produce 400,000 fuel rails. This coming quarter, Acme has contracts to supply 380,000 fuel rails. Given the 380,000 fuel rail sales volume, Acme anticipates the following profitability this coming quarter:

	Total	Per Unit	Percentage of Revenue
Sales Volume	380,000 rails
Sales Revenue & Selling Price	$7,980,000	$21.00 per rail	100%
Variable Cost	5,985,000	15.75 per rail	75%
Contribution Margin	$1,995,000	$ 5.25 per rail	25%
Fixed Cost	1,600,000	4.21 per rail	20%
Operating Profit	$ 395,000	$ 1.04 per rail	5%

***Requirements are on the next two pages**

Problem 1 Part a:

Acme Automakers general manager is concerned about the accuracy of the marketing teams sales volume forecast. She has asked you to calculate how many fuel rails must be sold to ensure that hits their profit target. Their profit target is $290,000.

She is also interested in how much profit could be earned if the marketing team were to sell an additional 20,000 fuel rails (thus reaching the companys max capacity).

Problem 1 Part b:

Indo-machine Manufacturing Corp. has asked if Acme Automakers would be interested in producing 8,000 customized fuel rails for them as a one-time special order. Although Acme can manufacture the rails using their existing capacity, Acme would have to invest an additional $30,000 in customized tooling to be able to build them using their existing equipment. The customized fuel rail would also cost an additional $0.25 in variable cost per rail over and above their standard $15.75 variable cost per unit.

How much should Acme Automakers charge for the customized fuel rail if they wish to generate $42,000 in incremental profit from the incremental business?

Indo-machine Manufacturing Corp. counters with a purchase price of $22.50. Would the special order still be profitable to Acme Automakers? If so, how much profit would it generate?

What intangible costs and/or benefits should Acme consider in deciding whether to accept Indo-manufacturings special order?