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. The common fixed expenses have been allocated to products based on sales dollars. Answer each question independently unless instructed otherwise. Use an excel format to answer each question. Assume that Ace expects to sell 80,000 units of B during the current year. One of Ace's sales representatives has found a new customer that is will to buy 10,000 additional units of B for a price of $30 per unit. Because of the reduced selling price the variable selling expense will be one-half of the normal variable selling expense on this special order. In addition there will be an extra S I per unit charge associated with thisorder. If Ace accepts this order how much will profits increase of decrease? Refer to (1) above. Assume Ace is producing at capacity tor B products and if Ace accepts the special order sales to regular customers will decrease by 10,000 units. If Ace accepts the order how much will profits increase or decrease? Refer to (1) above. Assume that Ace will produce the extra 10,000 units and will not reduce sales to regular customers. Because Ace is now producing in excess of capacity (for just this order) some units costs associated with the special order will increase. These costs will increase by 20%. Which costs do you expect to increase? If Ace accepts the order how much will profits increase o r decrease? Refer to (3) above. Suppose Ace counter offers. What price should Ace propose to the customer if Ace wants to make a profit of $1.50 per unit?

Explanation / Answer

1) profit or loss on additional Sale of 10000 units of B Unit Rate/pc Value Nos $/pc $ Sale 10000 30          300,000 Less:- Variable Cost Direct material 10000 10          100,000 Direct Labour 10000 10          100,000 variable Mfg overhead 10000 5            50,000 Variable Selling oh 10000 2.5            25,000 (1/2 of normal $ 5) Additional Charge 10000 1            10,000 Total Variable Cost           28.5          285,000 Margin            15,000 Margin will increase by $ 15000 in accepting the order of 10000 units of B 2) if leave the order of Existing Customer of 10000 units, then profit will be Unit Rate/pc Value Nos $/pc $ Sale 10000 60          600,000 Less:- Variable Cost Direct material 10000 10          100,000 Direct Labour 10000 10          100,000 variable Mfg overhead 10000 5            50,000 Variable Selling oh 10000 5            50,000 Total Variable Cost          300,000 Margin          300,000 decrease in margin in leaving the order is $ 300000- $ 15000 = $ 285000. 3) if increase the production Capcity, then Fixed Cost will increase by 20%. $ Margin as per (1) 15000 Less :- 20% of Fixed cost 38760 (19.38 X 20%)X10000 Loss on Additional Order -23760 4) If Ace want 1.5 $/pc to make profit then price will be $ Variable cost as per 1         28.50 Add:- Fixed cost 19.38 X 20%           3.88 Add:- Profit required 1.5 Offer price per unit         33.88

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