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: Are considers its traceable fixed manufacturing overhead to be avoidable, but its common fixed expenses are deemed un avoidable 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

Ace Company All Amounts in $ 1. Contribution Margin for each Product Product Product No. of units of Raw Material A B Product A Product B Sales Price 100 60 Cost of Sales Direct Material 25 10 5 2 Direct Labor 15 10 Variable Manufacturing Overheads 10 5 Contribution Margin 50 35 2. Based on Absorption Costing Method Product Product A B Sales Price 100 60 Cost of Sales Direct Material 25 10 Direct Labor 15 10 Variable Manufacturing Overheads 10 5 Common Fixed Overheads 15.63 9.375 Gross Margin 34.37 25.625 3. Contribution Margin per pound of raw material For Product A = 10 For Product B = 17.5 4. Traceable Fixed Overhead Costs incurred by A Company For Product A 1500000 For Product B 1000000 Total 2500000

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