Ace Company manufactures two products called A and B that sell for $100 and $60
ID: 2461303 • Letter: A
Question
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
Ace considers its traceable fixed manufacturing overhead to be avoidable, but its common fixed expenses are deemed unavoidable and have been allocated to products based on sales dollars.
What is the contribution margin of each product?
Assume that Ace uses the absorption method to compute product cost. What is the gross margin per unit of each product?
What contribution margin per pound of raw material is earned by each product?
What is the total traceable fixed overhead cost incurred by Ace Company?
What is the total common fixed expense incurred by Ace Company?
Assume that Ace expects to produce and sell 75,000 units of A during the current year. A supplier has offered to manufacture and deliver 75,000 units of A for a price of $68. If Ace accepts this offer instead of manufacturing those units how much will profits increase? /decrease?
Assume that Ace expects to produce and sell 60,000 of product A during the current year. A supplier has offered to manufacture and deliver 60,000 units of A for a price of $80 each. If Ace accepts the offer how much will profits increase/ decrease?
Using the information in 7 above, assume the space used for producing product A can be used to produce a contribution margin of $50,000. If Ace chooses this action how much will profit increase?/decrease.
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 15.63 9.375 Total Cost per Unit $90.63 $49.375Explanation / Answer
1) Product A B Selling Price 100 60 Less : Variable cost Direct Material 25 10 Direct labor 15 10 Variable manufacturing overhead 10 5 Variable selling expenses 10 5 Total variable cost 60 30 Contribution per unit 40 30 2) Product cost - absorption method Product A B Direct Material 25 10 Direct labor 15 10 Variable manufacturing overhead 10 5 Traceable fixed cost 15 10 Common fixed cost 15.63 9.375 Total product cost 80.63 44.375 A B Selling price per unit 100 60 Product cost per unit 80.63 44.375 Gross margin per unit 19.37 15.625 3) Product A B Direct Material 25 10 Cost per pound 5 5 Direct Material used per unit 5 2 Contribution per unit 40 30 Contribution per pound 8 15 4) Total traceable fixed cost = 100000 * 15 + 100000 * 10 = 1500000 + 1000000 = 2500000 5) Total common fixed cost = 100000 * 15.63 + 100000 * 9.375 = 1563000 + 937500 = 2500500 6) A The cost price of purchase 68 Cost of common fixed cost 15.63 Total cost of purchase 83.63 Cost of producing 90.63 Incremental profit if purchased 7 Number of units purchased/ produced 75000 Total increase in profit if purchased 525000 7) Product A The cost price of purchase 80 Cost of common fixed cost 15.63 Total cost of purchase 95.63 Cost of producing 90.63 Incremental loss if purchased per unit -5 Number of units purchased/ produced 60000 Loss if purchased -300000 8) Product A A Contribution per unit ( Absorption costing) 9.37 100 - 90.63 Number of units produced 50000 Total contribution 468500 contribution margin from other product 50000 Profit will decrease by 418500
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