am. 115. After 10 years in business, Blue's Company was making a significant profit on its Whiz-It Blenders. These blenders could whip up afrosty shake or act as a food processor. One key to this product's success is its stainless-steel blade, currently manufactured in-house.The blade division's costs are reported below. It currently only has capacity to supply the internal blender division with these blades.The company has not seriously considered taking these blades to the outside market yet.Direct material$4.00 per unitDirect labor5.00 per unitVariable-MOH2.00 per unitFixed-MOH5.00per unitTotal$16.00 per unit(a)If the market price of a similar stainless-steel blade is $13 per unit, will the blade division and the blender division be interested insetting a transfer price for its blades?YesIf so, within what range will that transfer price fall?(b)Minumum transfer price$11Maximum transfer price$16eTextbook and MediaAttempts: 1 of 1 usedSuppose a new supplier enters the market, providing stainless-steel blades for $12 per unit. Will this change the transfer pricerange within which the blade division and blender division may agree to transact?Minumum transfer price+A$Maximum transfer price$

Transfer price is the price at which one division transfers its goods, to the other division of the…

Answered: (b) If the market price of a similar…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter12: Activity-based Management

Section: Chapter Questions

Problem 28P: Bienestar, Inc., has two plants that manufacture a line of wheelchairs. One is located in Kansas...

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Bienestar, Inc., has two plants that manufacture a line of wheelchairs. One is located in Kansas City, and the other in Tulsa. Each plant is set up as a profit center. During the past year, both plants sold their tilt wheelchair model for 1,620. Sales volume averages 20,000 units per year in each plant. Recently, the Kansas City plant reduced the price of the tilt model to 1,440. Discussion with the Kansas City manager revealed that the price reduction was possible because the plant had reduced its manufacturing and selling costs by reducing what was called non-value-added costs. The Kansas City manufacturing and selling costs for the tilt model were 1,260 per unit. The Kansas City manager offered to loan the Tulsa plant his cost accounting manager to help it achieve similar results. The Tulsa plant manager readily agreed, knowing that his plant must keep pacenot only with the Kansas City plant but also with competitors. A local competitor had also reduced its price on a similar model, and Tulsas marketing manager had indicated that the price must be matched or sales would drop dramatically. In fact, the marketing manager suggested that if the price were dropped to 1,404 by the end of the year, the plant could expand its share of the market by 20 percent. The plant manager agreed but insisted that the current profit per unit must be maintained. He also wants to know if the plant can at least match the 1,260 per-unit cost of the Kansas City plant and if the plant can achieve the cost reduction using the approach of the Kansas City plant. The plant controller and the Kansas City cost accounting manager have assembled the following data for the most recent year. The actual cost of inputs, their value-added (ideal) quantity levels, and the actual quantity levels are provided (for production of 20,000 units). Assume there is no difference between actual prices of activity units and standard prices. Required: 1. Calculate the target cost for expanding the Tulsa plants market share by 20 percent, assuming that the per-unit profitability is maintained as requested by the plant manager. 2. Calculate the non-value-added cost per unit. Assuming that non-value-added costs can be reduced to zero, can the Tulsa plant match the Kansas City per-unit cost? Can the target cost for expanding market share be achieved? What actions would you take if you were the plant manager? 3. Describe the role that benchmarking played in the effort of the Tulsa plant to protect and improve its competitive position.
Wright Plastic Products is a small company that specialized in the production of plastic dinner plates until several years ago. Although profits for the company had been good, they have been declining in recent years because of increased competition. Many competitors offer a full range of plastic products, and management felt that this created a competitive disadvantage. The output of the companys plants was exclusively devoted to plastic dinner plates. Three years ago, management made a decision to add additional product lines. They determined that existing idle capacity in each plant could easily be adapted to produce other plastic products. Each plant would produce one additional product line. For example, the Atlanta plant would add a line of plastic cups. Moreover, the variable cost of producing a package of cups (one dozen) was virtually identical to that of a package of plastic plates. (Variable costs referred to here are those that change in total as the units produced change. The costs include direct materials, direct labor, and unit-based variable overhead such as power and other machine costs.) Since the fixed expenses would not change, the new product was forecast to increase profits significantly (for the Atlanta plant). Two years after the addition of the new product line, the profits of the Atlanta plant (as well as other plants) had not improvedin fact, they had dropped. Upon investigation, the president of the company discovered that profits had not increased as expected because the so-called fixed cost pool had increased dramatically. The president interviewed the manager of each support department at the Atlanta plant. Typical responses from four of those managers are given next. Materials handling: The additional batches caused by the cups increased the demand for materials handling. We had to add one forklift and hire additional materials handling labor. Inspection: Inspecting cups is more complicated than plastic plates. We only inspect a sample drawn from every batch, but you need to understand that the number of batches has increased with this new product line. We had to hire more inspection labor. Purchasing: The new line increased the number of purchase orders. We had to use more resources to handle this increased volume. Accounting: There were more transactions to process than before. We had to increase our staff. Required: 1. Explain why the results of adding the new product line were not accurately projected. 2. Could this problem have been avoided with an activity-based cost management system? If so, would you recommend that the company adopt this type of system? Explain and discuss the differences between an activity-based cost management system and a traditional cost management system.
Asbury Coffee Enterprises (ACE) manufactures two models of coffee grinders: Personal and Commercial. The Personal grinders have a smaller capacity and are less durable than the Commercial grinders. ACE only recently began producing the Commercial model. Since the Introduction of the new product, profits have been steadily declining, although sales have been increasing. The management at ACE belleves that the problem might be in how the accounting system allocates costs to products. The current system at ACE allocates manufacturing overhead to products based on direct labor costs. For the most recent year, which Is representative, manufacturing overhead totaled $2,091,000 based on production of 30,000 Personal grinders and 10,000 Commercial grinders. Direct costs were as follows: Direct materials Direct labor Personal $ 1,448,200 1,034,000 Commercial $ 661,000 708,500 Total $ 2,109,200 1,742,500 Management has determined that overhead costs are caused by three cost drivers. These…
Bigdeal Corporation manufactures paper and paper products and istrying to decide whether to purchase Smalltek Company. Smalltek has developed a process for manufacturing boxes that can replace containers that use fluorocarbons for expelling a liquid product. The price may be as high as $45 million. Bigdeal prefers to buy Smalltek and integrate its products while leaving the Smalltek management in charge of day-to-dayoperations. A major consideration is the efficiency and effectiveness of Smalltek’s operations. Bigdeal wants to obtain a report on the operational efficiency and effectiveness of the Smalltek sales, production, and research and development departments.Required:Who can Bigdeal engage to produce the report resulting from this operational audit? Several possibilities exist. Are there any particular advantages or disadvantages in choosing from among them?
Praveen Co. manufactures and markets a number of rope products. Management is considering the future of Product XT, a special rope for hang gliding, that has not been as profitable as planned. Since Product XT is manufactured and marketed independently of the other products, its total costs can be precisely measured. Next year’s plans call for a $200 selling price per 100 yards of XT rope. Its fixed costs for the year are expected to be $270,000, up to a maximum capacity of 700,000 yards of rope. Forecasted variable costs are $140 per 100 yards of XT rope. Required 1. Estimate Product XT’s break-even point in terms of (a) sales units and (b) sales dollars. 2. Prepare a contribution margin income statement showing sales, variable costs, and fixed costs for Product XT at the break-even point.
Alexandria Ltd. manufactures high-quality pens. For many years the company manufactured only one type of pen (namely, ballpoint pens) but last year the company also began to manufacture fountain pens. The decision to begin manufacturing fountain pens was taken only after the company’s marketing manager confirmed that there was a significant niche market for fountain pens and the company’s cost accountant estimated that the cost of production for such pens would be much less than the selling price predicted by the marketing manager. When the fountain pen was introduced, sales (in terms of both quantity and price) were higher than expected. Nevertheless the overall profits of Alexandria Ltd. have declined steadily. As a result, the cost accountant decided that he should re-examine his estimate of the cost of producing the fountain pen, with particular reference to overhead costs. In his original analysis, he allocated all manufacturing overhead costs to products in proportion to direct…
Tidwell, Inc., has two plants that manufacture a line of wheelchairs. One is located in Dallas, and the other in Oklahoma City. Each plant is set up as a profit center. During the past year, both plants sold their tilt wheelchair model for $1,782. Sales volume averages 20,000 units per year in each plant. Recently, the Dallas plant reduced the price of the tilt model to $1,584. Discussion with the Dallas manager revealed that the price reduction was possible because the plant had reduced its manufacturing and selling costs by reducing what was called “non-value-added costs.” The Dallas manufacturing and selling costs for the tilt model were $1,386 per unit. The Dallas manager offered to loan the Oklahoma City plant his cost accounting manager to help it achieve similar results. The Oklahoma City plant manager readily agreed, knowing that his plant must keep pace—not only with the Dallas plant but also with competitors. A local competitor had also reduced its price on a similar model,…
Wheelco, Inc., manufactures automobile and truck wheels. The company produces four basic, high-volume wheels used by each of the large automobile and pickup truck manufacturers. Wheelco also has two specialty wheel lines. These are fancy, complicated wheels used inexpensive sports cars. Lately, Wheelco's profits have been declining. Foreign competitors have been undercutting Wheelco's prices in three of its bread-and-butter product lines, and Wheelco's sales volume and market share have declined. In contrast, Wheelco's specialty wheels have been selling steadily, although in relatively small numbers, in spite of three recent price increases. At a recent staff meeting, Wheelco's president made the following remarks: "Our profits are going down the tubes, folks. It costs us 29 dollars to manufacture our A22 wheel. That's our best-seller, with a volume last year of 17,000 units. But our chief competitor is selling basically the same wheel for 27 bucks. I don't see how they can…
Tidwell, Inc., has two plants that manufacture a line of wheelchairs. One is located in Dallas, and the other in Oklahoma City. Each plant is set up as a profit center. During the past year, both plants sold their tilt wheelchair model for $1,782. Sales volume averages 20,000 units per year in each plant. Recently, the Dallas plant reduced the price of the tilt model to $1,584. Discussion with the Dallas manager revealed that the price reduction was possible because the plant had reduced its manufacturing and selling costs by reducing what was called “non-value-added costs.” The Dallas manufacturing and selling costs for the tilt model were $1,386 per unit. The Dallas manager offered to loan the Oklahoma City plant his cost accounting manager to help it achieve similar results. The Oklahoma City plant manager readily agreed, knowing that his plant must keep pace—not only with the Dallas plant but also with competitors. A local competitor had also reduced its price on a similar model,…
Megaphone Corporation produces a molded plastic casing, M&M101, for many cell phones currently on the market. Summary data from its 2017 income statement are as follows:Revenues $5,000,000 Variable costs 3,250,000 Fixed costs 1,890,000 Operating income $ (140,000) Joshua Kirby, Megaphone’s president, is very concerned about Megaphone Corporation’s poor profitability. He asks Leroy Gibbs, production manager, and Tony DiNunzo, controller, to see if there are ways to reduce costs. After 2 weeks, Leroy returns with a proposal to reduce variable costs to 55% of revenues by reducing the costs Megaphone currently incurs for safe disposal of wasted plastic. Tony is concerned that this would expose the company to potential environmental liabilities. He tells Leroy, “We would need to estimate some of these potential environmental costs and include them in…
Megaphone Corporation produces a molded plastic casing, M&M101, for many cell phones currently on the market. Summary data from its 2017 income statement are as follows:Revenues $5,000,000 Variable costs 3,250,000 Fixed costs 1,890,000 Operating income $ (140,000) Joshua Kirby, Megaphone’s president, is very concerned about Megaphone Corporation’s poor profitability. He asks Leroy Gibbs, production manager, and Tony DiNunzo, controller, to see if there are ways to reduce costs. After 2 weeks, Leroy returns with a proposal to reduce variable costs to 55% of revenues by reducing the costs Megaphone currently incurs for safe disposal of wasted plastic. Tony is concerned that this would expose the company to potential environmental liabilities. He tells Leroy, “We would need to estimate some of these potential environmental costs and include them in…
Asbury Coffee Enterprises (ACE) manufactures two models of coffee grinders. Personal and Commercial. The Personal grinders have a smaller capacity and are less durable than the Commercial grinders. ACE only recently began producing the Commercial model. Since the introduction of the new product, profits have been steadily declining, although sales have been increasing. The management at ACE believes that the problem might be in how the accounting system allocates costs to products. The current system at ACE allocates manufacturing overhead to products based on direct labor costs. For the most recent year, which is representative, manufacturing overhead totaled $1,929,000 based on production of 30,000 Personal grinders and 10,000 Commercial grinders. Direct costs were as follows: Direct materials Direct labor Cost Driver Number of production runs Quality tests performed Shipping orders processed Total overhead Management has determined that overhead costs are caused by three cost…

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