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Date Submitted: 11/13/2012 07:29 PM
ISSN 1940-204X
Ace Fertilizer Company:
Ethical Cost Allocations and Price Determination
Jerry Kreuze
Western Michigan University
Sheldon Langsam
Western Michigan University
INTRODUCTION
contracts. Completed, initialed customer contracts then proceed
to Tom Brennen for his ultimate approval and signature.
All special orders at Ace Fertilizer follow a prescribed
billing formula. These special orders, unless specific
authorization is obtained from Tom Brennen himself,
must be billed at 80 percent over the cost of the order.
Tom Brennen rarely allows exceptions to this formula,
as sufficient demand exists for Ace Fertilizer’s operating
capacity. Although Ace maintains an extensive raw materials
inventory, on occasion these special orders require Abby to
order materials specific to the order. These materials are
acquired in the most economical order quantity available.
The special order is 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.
What Abby likes especially about Ace Fertilizer is its
family atmosphere. In fact, Abby has been invited several
times by George Smilee to his family get-togethers. George
is close to his family, most of whom live within a 10-mile
radius. The family has regular get-togethers attended
faithfully by George and his two brothers. George’s family
has become very close since the untimely death of George’s
father last year. His brothers are all self-employed in a
variety of businesses, and on occasion Ace Fertilizer does
special orders for them.
Having a double...