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Garner Industries manufactures precision tools
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 0.658 million units to 3,100 customers each year. The manufacturing cost is $300 per unit. In addition, Garner has determined that the order-filling cost is $49.60 per unit. The $464.00 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 $120,000. In addition, the firm incurs $1,200 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 158,000 units to 1,000 SCs. On average each SC buys 158 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 $400 per unit and threatens to take his business elsewhere. Garner does not give in because the $400 price Cheap demands is below cost. Besides, she has recently raised the price to SC to $502.53 per unit and experienced no decline in orders.
Required:
1. How did Garner arrives at the $49.60 order-filling cost per unit?
2. What would be the amount of loss (profit) per unit if Garner sells to Cheap at $400 per unit?
3. What is the amount of loss (profit) per unit at the $502.53 selling price per unit for units sold to SC?
Expert Solution
| 1) | |
| Calculation Total Number of Orders: | |
| Total orders of PC (100*2) | 200 |
| Total orders of SC (1000*10) | 10000 |
| Total Orders | 10200 |
| Calculation of Number of Blocks: | |
| Total number of orders | 10200 |
| Orders per each block | 60 |
| Number of blocks | 170 |
| Calculation of Order Filling Cost: | |
| Number of blocks | 170 |
| Cost per block | $120,000 |
| Total cost of blocks | $20,400,000 |
| Number of orders | 10200 |
| Cost per order | $1,200 |
| Total cost of orders | $12,240,000 |
| Total order filling cost | $32,640,000 |
| Calculation of Order Filling Cost per Unit: | |
| Total order filling cost | $32,640,000 |
| Number of units | 658065 |
| Order Filing Cost per Unit | $49.60 |
| 2) | |
| Number of units | 5000 |
| Sales price per unit | $400 |
| Revenue | $2,000,000 |
| less: | |
| Manufacturing cost (5000*$300) | 1500000 |
| Order Filling cost (5000*$49.60) | $248,000 |
| Net profit | $252,000 |
| Net profit per unit ($252,000/5,000 Units) | $50.40 |
| 3) | |
| Number of units | 158000 |
| Sales price per unit | $502.53 |
| Revenue | $79,399,740.00 |
| less: | |
| Manufacturing cost (158000*$300) | 47400000 |
| Order Filling cost (158000*$49.60) | $7,836,800 |
| Net profit | $24,162,940.00 |
| Net profit per unit ($24,162,940/158,000units) | $152.93 |
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