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 1 million units to 4,100 customers each year. The manufacturing cost is $600 per unit. In addition, Garner has determined that the order-filling cost is $100.50 per unit. The $784.56 selling price per unit includes 12% 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 $1,500 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 500,000 units to 4,000 SCs. On average each SC buys 125 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 $800 per unit and experienced no decline in orders. Required: 1. Demonstrate how Garner arrives at the $100.50 order-filling cost per unit. 2. What would be the amount of loss (profit) per unit if Garner sells to Cheap at $700 per unit? 3. What is the amount of loss (profit) per unit at the $800 selling price per unit for units sold to SC?

Answer 1

1) Number of orders per block [(100 PCs x 2) + (4,000 SCs x 10)] Total number of orders 40,200 60 [40200 orders / 60 blocks] Total number of blocks 670 $60,000 Cost per block $40,200,000 [670 blocks x $60000] [As calculated above] Total cost of order blocks Total number of orders 40,200 Per order order-filling cost $1,500 Total cost of per order-filling $60,300,000 [40200 orders x $1500] $100,500,000 [$40200000 + $60300000] Total order-filling cost Total units sold 1,000,000 $100.50 [$100500000 / 1000000 units] Order-filling cost per unit 2) $600.00 [Given] Manufacturing cost per unit $1.00 [Ref: Workings] Order-filling cost per unit Total relavant cost per unit $601.00 $700.00 Selling price per unit Amount of profit (loss) per unit $99.00 [$700.00 - $601.00]

Workings: For PCs [(100 PCs x 2) + (4,000 SCs x 10)] Total number of orders 200 Number of orders per block 60 [200 orders / 60 blocks] Total number of blocks 3.3333 $60,000 Cost per block $200,000 [3.3333 blocks x $60000] Total cost of order blocks [As calculated above] Total number of orders 200 Per order order-filling cost $1,500 Total cost of per order-filling $300,000 [200 orders x $1500] $500,000 [$200000 + $300000] Total order-filling cost Total units sold 500,000 [100 PCs x 5,000 units] $1.00 [$500000 / 500000 units] Order-filling cost per unit 3) $600.00 [Given] Manufacturing cost per unit $200.00 [Ref: Workings] $800.00 Order-filling cost per unit Total relavant cost per unit $800.00 [Given] $0.00 [$800.00 - $800.00] Selling price per unit Amount of profit (loss) per unit

Workings: For SCs 40,000 Total number of orders [4,000 SCs x 10] Number of orders per block 60 [40000 orders / 60 blocks] Total number of blocks 666.6667 Cost per block $60,000 $40,000,000 [666.6667 blocks x $60000] Total cost of order blocks [As calculated above] Total number of orders 40,000 Per order order-filling cost $1,500 Total cost of per order-filling $60,000,000 [40000 orders x $1500] Total order-filling cost $100,000,000 [$40000000 + $60000000] 500,000 [4,000 SCs x 125 units] Total units sold $200.00 [$100000000 / 500000 units] Order-filling cost per unit