Question

Problem 1 - Chapter 5

Acme Automaker manufactures fuel rails for various engine applications. Currently, Acme has capacity to produce 400,000 fuel rails. This coming quarter, Acme has contracts to supply 380,000 fuel rails. Given the 380,000 fuel rail sales volume, Acme anticipates the following profitability this coming quarter:

	Total	Per Unit	Percentage of Revenue
Sales Volume	380,000 rails
Sales Revenue & Selling Price	$7,980,000	$21.00 per rail	100%
Variable Cost	– 5,985,000	– 15.75 per rail	– 75%
Contribution Margin	$1,995,000	$ 5.25 per rail	25%
Fixed Cost	– 1,600,000	– 4.21 per rail	– 20%
Operating Profit	$   395,000	$ 1.04 per rail	5%

***Requirements are on the next two pages**

Problem 1 Part a:

Acme Automakers’ general manager is concerned about the accuracy of the marketing team’s sales volume forecast. She has asked you to calculate how many fuel rails must be sold to ensure that hits their profit target. Their profit target is $290,000.

She is also interested in how much profit could be earned if the marketing team were to sell an additional 20,000 fuel rails (thus reaching the company’s max capacity).

Problem 1 Part b:

Indo-machine Manufacturing Corp. has asked if Acme Automakers would be interested in producing 8,000 customized fuel rails for them as a one-time special order. Although Acme can manufacture the rails using their existing capacity, Acme would have to invest an additional $30,000 in customized tooling to be able to build them using their existing equipment. The customized fuel rail would also cost an additional $0.25 in variable cost per rail over and above their standard $15.75 variable cost per unit.

How much should Acme Automakers charge for the customized fuel rail if they wish to generate $42,000 in incremental profit from the incremental business?

Indo-machine Manufacturing Corp. counters with a purchase price of $22.50. Would the special order still be profitable to Acme Automakers? If so, how much profit would it generate?

What intangible costs and/or benefits should Acme consider in deciding whether to accept Indo-manufacturing’s special order?

Answer 1

Answer is given below

Parta Fixed Cost Target profit Total target $1,600,000 $290,000 $1,890,000 Units Total target Contribution per unit $1,890,000 $5.25 360,000 Additional profit Additional units Contribution per unit Additional profit 20,000 $5.25 $105,000 Part b Variable cost Customized tool Incremental profit Total Target Total units Selling price per unit) $128,000 (8,000*$16) $30,000 $42,000 $200,000 8,000 $25 $180,000 (8,000*$22.5) Counter offer Total Sales Less: Variable cost Customized tool Net profit $128,000 (8,000*$16) $30,000 $22,000 Profit will increase by $22,000 at counter price of $22.50 Intangible costs Any other incremental cost to process the order whether normal sales are affected Whether order is one time or regular order Intangible benefits Capacity utilization Asset turnover