Ace Company manufactures two products called A and B that sell for $100 and $60

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: 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.

Explanation / Answer

1) A B Selling price per unit $ 100.0 $ 60.0 Less: variable costs Direct Material $ 25.0 $ 10.0 Direct labour $ 15.0 $ 10.0 Variable Manufacturing overhead $ 10.0 $ 5.0 $               50.0 $       25.0 Contribution margin per unit $               50.0 $       35.0 2) A B Selling price per unit $ 100.00 $ 60.00 Less: total cost per unit $ 90.63 $ 49.38 Gross margin per unit $ 9.37 $ 10.63 3) A B (a) Contribution margin per unit $ 50.00 $ 35.00 (b)raw material cost $ 25.00 $ 10.00 (c) Raw material cost per pound $ 5.00 $ 5.00 (d) quantity of Raw material (pound) required per unit (b/c) 5 2 Contribution margin per pound of raw material (a/d) $ 10.00 $ 17.50 4) A B Total for the company Total number of units produced 10000 10000 Traceable fixed overhead per unit $ 15.00 $ 10.00 Total tracable fixed overhead $ 1,50,000.00 $ 1,00,000.00 $ 2,50,000.00

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