Ace Fertilizer Case

Case Summary:

In this case study, Ace Fertilizer’s Assistant Director of Manufacturing, Abby Conroy, is faced with an ethical dilemma presented by her direct manager George Smilee, Director of Manufacturing. Ace Fertilizer’s Principal business is production of lawn & gardening fertilizer, however the company has a proven record of delivering high quality, on-time products in the special orders market. It’s the quality and on-time production that drives this area of the business. They use a consistent billing formula for special orders at an 80% markup over the cost of the orders.

Abby Conroy prefers allocating indirect costs using Activity-Based Costing for these orders, recognizing that not all costs are driven by volume of output. Abby is preparing a cost estimate for Breeland Ltd., a company that has requested a special order for a solvent whose ingredients include 40 gallons of a chemical called XO-1600. The chemical XO-1600 is only available in 50-gallon drums and has a shelf-life of only 20 days once opened. After 20 days, the substance becomes unstable and must be discarded properly. Breeland Ltd. does not wish to keep the unused gallons.

The following is her cost estimate:

Direct Materials

Non-XO-1600 $20,000

XO-1600 Purchase Cost $80,000

Disposal Cost $10,000

Direct Labor $30,000

Unit-level Activity Cost ($40 * 4,000 gallons) $160,000

Batch-level Activity Cost ($5000 * 4 batches) $20,000

Product-level Activity Cost $80,000

Customer-level Activity Cost $30,000

Organization-sustaining level Activity cost

(20,000+80,000+10,000+30,000+160,000+20,000) $320,000

Total Cost of Breeland Ltd Special Order $750,000

Markup on cost ($750000/.80) $900,000

Total Price Determination for Breeland Ltd. order $1,650,000

Since Breeland Ltd only needs 40 gallons of XO-1600, they do not wish to keep the unused gallons and no other orders are confirmed that uses this...