Solved: Garner Industries manufactures precision tools

The firm uses an

Garner Industries manufactures precision tools. The firm uses an activity-based costing system.
CEO Deb Garner is very proud of the accuracy of the system in determining product costs. She
noticed that since the installment of the ABC system 10 years earlier the firm had become much
more competitive in all aspects of the business and earned an increasing amount of profits
every year.
In the last two years the firm sold 1 million units to 4,100 customers each year. The
manufacturing cost is $600 per unit. In addition, Garner has determined that the order-filling
cost is $100.50 per unit. The $784.56 selling price per unit includes 12 percent markup to cover
administrative costs and profits. The order-filling cost per unit is determined based on the firm's
costs for order-filling activities. Order filling capacity can be added in blocks of 60 orders. Each
block costs $60,000. In addition, the firm incurs $1,500 order-filling costs per order. Garner
serves two types of customers designated as PC (Preferred Customer) and SC (Small
Customer). Each of the 100 PCs buys, on average, 5,000 units in two orders. The firm also sells
500,000 units to 4,000 SCs. On average each SC buys 125 units in 10 orders. Ed Cheap, a
buyer for one PC, complains about the high price he is paying. Cheap claims that he has been
offered a price of $700 per unit and threatens to take his business elsewhere. Garner does not
give in because the $700 price Cheap demands is below cost. Besides, she has recently raised
the price to SC to $800 per unit and experienced no decline in orders.

Required
1. Demonstrate how Garner arrives at the $100.50 order-filling cost per unit.
2. What would be the amount of loss (profit) per unit if Garner sells to Cheap at $700 per unit?
3. What is the amount of loss (profit) per unit at the $800 selling price per unit for units sold to
SC?

ANSWER
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