Ace Fertilizer Case

ACE Fertilizer Company

1. It appears that Abby calculated the direct materials, direct labor, and indirect costs correctly. She also used cost activity pools that are appropriate. However, I’m not sure why she included Organization-sustaining costs since they are not related to any specific product. According to Chapter 7, organization sustaining costs “will not be assigned to products because they represent resources that are not consumed by products” (pg. 280). Also, I think she indirectly calculated the markup cost by dividing by 80% rather than multiplying. These two errors caused the total cost to be overestimated by $876,000. See below for the corrected cost estimate.

2. George was presented with a potential opportunity to sell the excess XO-1600 to his brother Josh during personal time at a family gathering. As director of manufacturing, George wants to leave the original quote that was prepared for Breeland as is, but Abby believes the quote should be revised to account for the potential sale of excess materials to Josh. Company policy states that special orders are “billed for the entire cost of the specially ordered materials, even if unused quantities remain. Customers are given the option of keeping these unused materials, but virtually all companies decline. An exception to that policy is only allowed when another confirmed order exists when the initial order is signed that requires the use of those excess materials. In that case, Tom Brennen, as a matter of fairness, insists that the cost of those materials be prorated among special orders.” I believe from a policy perspective that George is correct in wanting to leave the initial quote unchanged because there are technically no new orders yet for the XO-1600. However, from a fairness standpoint, I believe that Abby is correct in wanting to revise the order to account for the potential sale of the excess materials to Josh. Ultimately I believe that it’s more important to be fair...