5. ACECO Continuing Problem
Vice President for Sales and Marketing Sam Totter is trying to plan for the coming year in terms of
production needs to meet the sales demand. He is also trying to determine ways in which the company’s
profits might be increased in the coming year. Instructions
(a) ACECO markets a simple water control and timer that it mass-produces. During 2013, the
company sold 696,000 units at an average selling price of per solution $4.20 per unit. The
variable expenses were $1,900,080, and the fixed expenses were $683,256.
(1) What is the product’s contribution margin ratio? (Round to nearest whole percentage)
(2) What is the company’s break-even point in units and in dollars for this product?
(3) What is the margin of safety, both in dollars and as a ratio? (Round to nearest whole
percentage)
(4) If management wanted to increase its income from this product by 10%, how many
additional units would have to be sold to reach this income level?
(5) If sales increase by 51,000 units and the cost behaviors do not change, how much will
income increase on this product?
(b) ACECO is thinking of mass-producing one of its special-order sprinklers. To do so would
increase variable costs for all sprinklers by an average of $0.70 per unit. The company also
estimates that this change could increase the overall number of sprinklers sold by 10%, and
the average sales price would increase $0.20 per unit. ACECO currently sells 491,740 sprinkler
units at an average selling price of $26.50. The manufacturing costs are $6,863,512 variable
and $2,050,140 fixed. Selling and administrative costs are $2,651,657 variable and $794,950
fixed.
(1) If ACECO begins mass-producing its special-order sprinklers, how would this affect the
company?
(2) If the average sales price per sprinkler unit did not increase when the company began
mass-producing the special-order sprinkler, what would be the effect on the company? 6. ACECO Continuing Problem
Part 1
ACECO has a sales mix of sprinklers, valves, and controllers as follows.
Annual expected sales:
Sale of sprinklers
Sale of valves
Sale of controllers 460,000 units at $26.50
1,480,000 units at $11.20
60,000 units at $42.50 Variable manufacturing cost per unit:
Sprinklers
$13.96
Valves
$ 7.95
Controllers
$29.75
Fixed manufacturing overhead cost (total)
$760,000
Variable selling and administrative expenses per unit:
Sprinklers
$1.30
Valves
$0.50
Controllers
$3.41
Fixed selling and administrative expenses (total) $1,600,000 Instructions
(a) Determine the sales mix based on unit sales for each product.
(b) Using the annual expected sales for these products, determine the weighted-average unit
contribution margin for these three products. (Round to two decimal places.)
(c) Assuming the sales mix remains the same, what is the break-even point in units for these
products?
Part 2
The section of ACECO that produces controllers for the company provided the following
information.
Sales for month of February: 4,000
Variable manufacturing cost per unit: $9.75
Sales price per unit: $42.50
Fixed manufacturing overhead cost (per month for controllers): $81,000
Variable selling and administrative expenses per unit: $3.00
Fixed selling and administrative expenses (per month for controllers): $13,122 Instructions
(a) Using this information for the controllers, determine the contribution margin ratio, the degree
of operating leverage, the break-even point in dollars, and the margin of safety ratio for
ACECO Corporation on this product. 7. ACECO Continuing Problem
Part 1
ACECO mass-produces a special connector unit that it normally sells for $3.90. It sells approximately
35,000 of these units each year. The variable costs for each unit are $2.30. A company in Canada that
has been unable to produce enough of a similar connector to meet customer demand would like to buy
15,000 of these units at $2.60 per unit. The production of these units is near full capacity at ACECO, so to
accept the offer from the Canadian company would require temporarily adding another shift to its
production line. To do this would increase variable manufacturing costs by $0.30 per unit. However,
variable selling costs would be reduced by $0.20 a unit.
An irrigation company has asked for a special order of 2,000 of the connectors. To meet this special
order, ACECO would not need an additional shift, and the irrigation company is willing to pay $3.10 per
unit. Instructions
Given the information above:
(a) What are the consequences of ACECO agreeing to provide the 15,000 units to the Canadian
company? Would this be a wise “special order” to accept? (b) Should ACECO accept the special order from the irrigation company?
Part 2
ACECO has discovered that a small fitting it now manufactures at a cost of $1.00 per unit could be bought
elsewhere for $0.82 per unit. ACECO has fixed costs of $0.20 per unit that cannot be eliminated by
buying this unit. ACECO needs 460,000 of these units each year.
If ACECO decides to buy rather than produce the small fitting, it can devote the machinery and labor
to making a timing unit it now buys from another company. ACECO uses approximately 500 of these units
each year. The cost of the unit is $12.66. To aid in the production of this unit, ACECO would need to
purchase a new machine at a cost of $2,345, and the cost of producing the units would be $9.90 a unit. Instructions
Given the information above:
(a) Without considering the possibility of making the timing unit, evaluate whether ACECO should
buy or continue to make the small fitting.
(b) (1) What is ACECO’ opportunity cost if it chooses to buy the small fitting and start
manufacturing the timing unit?
(2) Would it be wise for ACECO to buy the fitting and manufacture the timing unit? Explain. 3
