Ace Company manufactures two products called A and B that se

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 $S 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. Use an excel format to answer each question. 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 in crease/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.

Solution

5. Total Common fixed expenses incurred by Ace Company.

            Total Common fixed overhead = ($15.63 * 100,000 units) * ($9.375 * 100,000 units)

            Total Common fixed overhead = $1,563,000 + $937,500

            Total Common fixed overhead = $2,500,500

6.

Product A

If Manufacturing

If Accepts offer

No of units expect to produce

75,000

75,000

Selling Price

100

100

Total Cost per unit:

     Total cost

90.63

0

     Suppliers cost

0

68

     Variable selling expenses

0

10

     Common fixed overheads

0

15.63

     Total cost

90.63

93.63

Operating Profit /(Loss)

9.37

6.37

Profit Increase /(Decrease) per unit

(3) (9.37-6.37)

Decrease in profit (3*75000)

(225,000)

           

7.

Product A

If Manufacturing

If Accepts offer

No of units expect to produce

60,000

60,000

Selling Price

100

100

Total Cost per unit:

     Total cost

90.63

0

     Suppliers cost

0

80

     Variable selling expenses

0

10

     Common fixed overheads

0

15.63

     Total cost

90.63

105.63

Operating Profit /(Loss)

9.37

                    (5.63)

Profit Increase /(Decrease) per unit

                                                             (15)

Decrease in profit

                                                  (900,000)

8.

Contribution margin if offer Accepcts = $100 - $80 = $20

No of units Produced = 60,000 units

Contribution Margin = $1,200,000

Add: contribution margin from alternative activity = $50,000

Total contribution margin = $1,250,000

Contribution margin if manufacturing = $100 – $65 = $35

No of units Produced = 60,000 units

Total contribution margin = $2,100,000

Decrease in profit = ($850,000)

	Product A
	If Manufacturing	If Accepts offer
No of units expect to produce	75,000	75,000
Selling Price	100	100
Total Cost per unit:
Total cost	90.63	0
Suppliers cost	0	68
Variable selling expenses	0	10
Common fixed overheads	0	15.63
Total cost	90.63	93.63
Operating Profit /(Loss)	9.37	6.37
Profit Increase /(Decrease) per unit	(3) (9.37-6.37)
Decrease in profit (3*75000)	(225,000)