Question 1 A jeweller orders gems in lot sizes of 1,250 gems. The annual demand for emeralds is 6,250 gems. Ordering costs are $200 per order and carrying costs are $10 per unit annually. Required: a. Determine the economic order quantity. b. Determine the amount of annual cost savings if the company changes from an order size of 1,250 units to the economic order size. c. One supplier offers a discount of $2 per unit off the purchase price of orders in lots of 625 units or more. What impact would this have on the EOQ and should the order size be changed?

Question 2 Ace Products sells its products for $22 each. Unit manufacturing costs are: direct materials, $4.00; direct manufacturing labour, $6.00; and variable manufacturing overhead, $3.00. Total fixed manufacturing overhead costs are $60,000 and marketing expenses are $2.00 per unit plus $20,000 per year. The current production level is 25,000 units although only 20,000 units are anticipated to be sold. Required: a. Prepare an income statement using absorption costing in the gross margin format. b. Prepare an income statement using variable costing in the contribution margin format. c. Provide a reconciliation of the difference between the operating income using absorption costing and using variable costing.