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Target Costing and Pricing

 

Exercise 8: Lovebug Company has determined that its new automotive hood screen would gain widespread customer acceptance if the company could price it at or under $30.  Anticipated labor hours and costs for each unit of the new product follow.

 

 

 

Direct Materials Cost

   

$5

     

Direct labor cost

           

Manufacturing labor:

           

    Hours

   

0.2

     

    Hourly labor rate

   

$10

     

Assembly labor:

           

   Hours

   

0.5

     

   Hourly labor rate

   

$15

     

Machine hours

   

1

     
             

The company currently uses the following three activity-based cost rates:

 
             

Machine handling

   

$0.30 per dollar of direct materials

Production

   

$5.00 per machine hour

 

Product delivery

   

$0.50 per unit

   

 

 

 

The company’s minimum desired profit is 40 percent over total production and delivery cost.  Compute the target cost for the new hood screen, and determine if the company should market it (Round to two decimal places).

 

 

 

Problem 5

 

Developing Transfer Prices

 

 

 

Sand Company has two divisions, Glass Division and Instrument Division.  For several years, Glass Division has manufactured a special glass container, which it sells to Instrument Division at the prevailing market price of $20.  Glass Division produces the glass containers only for Instrument Division and does not sell the product to outside customers.  Annual production and sales volume is 20,000 containers.  A unit cost analysis for Glass Division follows.

 

 

 

Cost Categories

     

Costs per Container

 

         

 

Direct Materials

     

$3.50

 

Direct labor, 1/4 hour

     

2.3

 

Variable overhead

     

7.5

 

Avoidable fixed costs: $30,000/20,000 units

 

1.5

 

Corporate overhead: $3.60 per direct labor hour

4.5

 

Variable shipping costs

   

1.2

 

Unit Cost

     

$20.50

 

 

 

 

Corporate overhead represents the allocated joint fixed costs of production- building depreciation, property taxes, insurance, and executives’ salaries.  A profit markup of 20 percent is used to determine transfer prices.

 

 

 

REQUIRED:

 

  1.  What would the appropriate transfer price for Glass Division to use in billing its transactions with Instrument Division?

  2. If Glass Division decided to sell some containers to outside customers, would your answer to requirement 1 change?  Defend your response.

  3. What factors concerning transfer price should management consider when transferring products between divisions?

     

    Exercise 4: Measures of Quality in a Service Business

     

    Rehab Health Care, LLC, incurred the service-related activity costs for the month that follow.

     

 

Total sales

$40,000

Customer complaint processing

1,000

Employee training

400

Reinspection and retesting

500

Design review of service procedures

300

Technical support

200

Investigation of service defects

800

Sample testing of vendors

100

Inspection of supplies

150

Quality audits

250

Quality-related downtime

300

 

 

 

Prepare an analysis of the costs of quality for Rehab Health Care.  Categorize the costs as (a) costs of conformance, with subsets of prevention costs and appraisal costs, or (b) costs or nonconformance, with subsets of internal failure costs and external failure costs.  Compute the percentage of sales represented by prevention costs, appraisal costs, total costs of conformance, internal failure costs, external failure costs, total costs of nonconformance, and total costs of quality.  Also compute the ratio of costs of conformance to total costs of quality of costs of nonconformance to total costs of quality.

 

 

 

Exercise 9: Measures of Production Performance

 

 

 

Analyze the following nonfinancial measures of quality for Sweet Express, Inc., a supplier of novelty candy boxes, for a recent four-week period.  Focus specifically on measures of production performance.

 

 

 

Measures of Quality

Week 1

Week 2

Week 3

Week 4

Percentage of defective products per million produced

0.9%

0.7%

0.5%

0.4%

Equipment utilitization rate

89%

90%

89%

90%

Machine downtime (hours)

11

9

12

11

Machine maintenance time (hours)

9

8

8

9

Machine setup time (hours)

3

4

5

3

 

 

 

 

 

Problem 4: Interpreting Measures of Quality

 

Circuit Corporation supplies integrated circuitry to major appliance manufacturers in all parts of the world.  Producing a high-quality product in each of the company’s four divisions is the mission of management.  Each division is required to record and report its efforts to achieve quality in all of its primary product lines.  The following information for the most recent three-month period was submitted to the chief financial officer:

 

 

 

 

Macon Division

Dothan Division

Valdosta Division

Columbia Division

                 
 

Amount

% of Rev

Amount

% of Rev

Amount

% of Rev

Amount

% of Rev

Costs of Conformance

               

Prevention Costs:

               

           Quality training of employees

$4,400

 

$15,600

 

$23,600

 

$8,900

 

           Process engineering

3,100

 

19,700

 

45,900

 

9,400

 

           Preventive maintenance

5,800

 

14,400

 

13,800

 

11,100

 

                          Total prevention costs

$13,300

0.95%

$49,700

3.11%

$83,300

5.55%

$29,400

1.73%

Appraisal costs:

               

             End-of-process sampling and testing

$3,500

 

$19,500

 

$21,400

 

$6,900

 

             Quality audits of products

6,100

 

11,900

 

17,600

 

8,700

 

            Vendor Audits

4,100

 

10,100

 

9,800

 

7,300

 

                        Total appraisal costs

13,700

0.98%

$41,500

2.59%

$48,800

3.25%

22,900

1.35%

            Total costs of conformance

27,000

1.93%

$91,200

5.70%

$132,100

8.80%

$52,300

3.08%

Costs of Nonconformance

               

Internal failure costs:

               

              Quality-related downtime

$26,800

 

$8,300

 

$6,500

 

$22,600

 

              Scrap and rework

17,500

 

9,100

 

7,800

 

16,200

 

              Scrap disposal losses

31,200

 

7,200

 

3,600

 

19,900

 

                           Total internal failure costs

75,500

5.39%

$24,600

1.54%

$17,900

1.19%

$58,700


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