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ISSN 1940-204X

Ace Fertilizer Company:

Ethical Cost Allocations and Price Determination

Jerry Kreuze

Western Michigan University

Sheldon Langsam

Western Michigan University


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...