Question

Garner Industries manufactures precision tools. The firm uses an activity-based costing system. CEO Deb Garner is very proud of the accuracy of the system in determining product costs. She noticed that since the installment of the ABC system 10 years earlier the firm had become much more competitive in all aspects of the business and earned an increasing amount of profits every year.

In the last two years the firm sold 0.635 million units to 3,700 customers each year. The manufacturing cost is $600 per unit. In addition, Garner has determined that the order-filling cost is $41.76 per unit. The $812.00 selling price per unit includes 16% markup to cover administrative costs and profits.

The order-filling cost per unit is determined based on the firm’s costs for order-filling activities. Order-filling capacity can be added in blocks of 60 orders. Each block costs $60,000. In addition, the firm incurs $1,600 order-filling costs per order.

Garner serves two types of customers designated as PC (Preferred Customer) and SC (Small Customer). Each of the 100 PCs buys, on average, 5,000 units in two orders. The firm also sells 135,000 units to 1,000 SCs. On average each SC buys 135 units in 10 orders. Ed Cheap, a buyer for one PC, complains about the high price he is paying. Cheap claims that he has been offered a price of $700 per unit and threatens to take his business elsewhere. Garner does not give in because the $700 price Cheap demands is below cost. Besides, she has recently raised the price to SC to $792.59 per unit and experienced no decline in orders. 1. What would be the amount of loss (profit) per unit if Garner sells to Cheap at $700 per unit? (Do not round your intermediate calculations. Loss amounts should be indicated with a minus sign. Round your answer to 2 decimal places.) SHOW ALL WORK 2. What is the amount of loss (profit) per unit at the $792.59 selling price per unit for units sold to SC? (Loss amounts should be indicated with a minus sign. Round your intermediate calculations to 2 decimal places.) SHOW ALL WORK

Answer 1

Fact of Question

	PC	SC
a. Customer	100	1000
b. Unit per Customer	5000	135
c. Total Unit a*b	500000	135000	635000
d. Order per customer	2 Order	10 Order
e. Unit per Order b/e	2500	13.5
f. Total Order c/e	200	10000
g. Order Filing cost per Order	1600	1600
h. Unit Per Order	2500	13.5
i. Total Order Filling Cost f*g	320000	16000000
j. Per unit Cost of Order Filing g/h	0.64	118.5185
k. Block Required (60 Order per block) f/60	3.333333	166.6667
l. Total Cost of Block k*60000	200000	10000000
m. Per Unit Cost of Block i/c	0.4	74.07407
n. Total Cost for Order Filng j+m	1.04	192.5926
o. Total Order cost n*c	520000	26000000	26520000
p. Total Unit			635000
q. Per Unit Cost of Order Filling o/p			41.76

Here in the above summary we obserserve that , order filing cost derived at point q is 41.76 is tallied with figure given in question.

So, Order filing cost for PC is 1.04 per unit and for SC is 192.59 per unit.

A. Selling Price : 700 per Unit to PC

Selling Price - 700

Manufacturing Cost - (600)

Order Filing Cost - (1.04)

Profit - 98.96 per unit Profit

B. Selling Price : 792.59 per Unit

Selling Price - 792.59

Manufacturing Cost - (600.00)

Order Filing Cost - (192.59)

Profit - Nil (No Profit No Loss)