Case Study

Ace Fertilizer Suggested Solution

The following is a recommended solution for the Ace Fertilizer case in Lesson 2. You will likely classify this as a decision case—evidence is reviewed, options for handling the situation are identified, and a recommendation is made.

BACKGROUND INFORMATION Ace Fertilizer’s primary business is manufacturing lawn and garden fertilizer. However, a growing part of their business manufactures special orders of chemicals and products for other uses. Abby Conroy, the assistant director, is responsible for all special orders received by the company. She has been approached to manufacture a cleaning solvent that will be used by Breeland Ltd. in their steel plating process. XO-1600 is a chemical that is needed in the formula for the cleaning solvent. Ace must order the chemical in 50-gallon drum quantities; however, they require only 40 gallons to manufacture the Breeland order. Company policy dictates that any unused materials should be offered to the purchaser if they cannot be used in another special order—Breeland does not want the additional materials. Abby has developed a price quote with the understanding that 10 gallons of X0-1600 will need to be disposed of at a cost of $10,000. She has used activity-based costing in allocating indirect costs to the order and, after a markup of 80% (again, a company standard), has developed a total order price of $1,650,000. A few days after Abby developed the price, she received notice that there may be purchaser for the remaining 10 gallons of X0-1600. George Smilee, the director of manufacturing, told his brother, Josh, about the Breeland deal at a family gathering and his brother has arranged to purchase the remaining 10 gallons for his business. George Smilee wants to keep the existing price quote for Breeland since the order with his brother is not fully finalized. He is planning to charge his brother the cost of the X0-1600, the organization-sustaining costs on the materials, and the...