Exam 13: Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing

Bryan Inc. produces a specialty top-quality juice machine. The product, the JM50, requires four processes to be completed. Specifically, these processes are exterior construction, pulp filter insertion, painting, and packaging. Each process is performed at separate workstations with different completion rates: Exterior construction can manufacture 100,000 juicer exteriors per day. Pulp filter insertion can install 25,000 filters every 6 hours. Painting can decorate 3,000 juicers every half hour. Packaging can package 5,000 juicers per hour. The plant operates 24/7, 24 hours a day every day of the week. What cost management technique does this case illustrate? (Assume an average 30-day month.)

Many firms are finding it is difficult to compete successfully on cost leadership or differentiation alone, and they must, in fact, compete on both:

Many firms choose to achieve target cost through redesign of the product or service because they recognize that design decisions:

The Gargus Company, which manufactures projection equipment, is ready to introduce a new line of portable projectors. The following data are available for a proposed model: Variable manufacturing costs Applied fixed manufacturing overhead 135 Variable selling and administrative costs 90 Applied fixed selling and administrative costs 105 What price will the company charge if the firm uses cost-plus pricing based on absorption cost and a markup percentage of 110%?

Lens Care Inc. (LCI) manufactures specialized equipment for polishing optical lenses. There are two models - one mainly used for fine eyewear (F-32) and another for lenses used in binoculars, cameras, and similar equipment (B-13). The manufacturing cost of each unit is calculated using activity-based costing, using the following manufacturing cost pools: The market price for B-13 and F-32 are reduced to $1,695 and $1,095 respectively. To achieve the target cost, Lens Care plans to reduce materials handling costs. How many parts must be removed from B-13 in order to achieve the target cost for B-13 (round up to whole units)?

Quality Chairs Inc. (QC) manufactures chairs for industrial use. Laura Winters, the Vice President for Marketing at QC, concluded from market analysis that sales were dwindling for QC's standard three-foot chair due to aggressive pricing by competitors. QC's chairs sold for $550 whereas the competition's comparable chair was selling for $495. Winters determined that a price drop to $495 would be necessary to regain market share and reach a targeted annual sales level of 10,000 chairs. Cost data based on sales of 10,000 chairs: Budgeted Actual Quantity Quantity Direct materials (board feet) 88,000 79,500 \ 1,250,000 Direct labor (hours) 71,350 73,775 875,000 Machine hours (hours) 11,400 11,250 250,000 Finishing and packing (hours) 6,500 6,400 125,000 The current cost per unit is:

Quality Industries manufactures large workbenches for industrial use. Yewell Hartnet, the Vice President for marketing at Quality Industries, concluded from market analysis that sales were dwindling for Quality's workbenches due to aggressive pricing by competitors. Quality's workbench sells for $1,140 whereas the competition's comparable workbench sells for $1,060. Yewell determined that a price drop to $1,060 would be necessary to retain market share and annual sales of 13,000 workbenches. Cost data based on sales of 13,000 workbenches: Budgeted Quantity Actual Quantity Actual Cost Direct materials (pounds) 175,000 168,000 \ 3,450,000 Direct labor (hours) 72,800 71,500 825,000 Machine setups (no. of setups) 900 880 250,000 Mechanical assembly (machine hours) 273,000 281,250 3,750,000 In order to reduce costs so as to reach the desired target cost, Quality Industries should also focus on reducing the cost of:

Which of the following is the speed at which units must be manufactured to meet customer demand?

Quality Industries manufactures large workbenches for industrial use. Yewell Hartnet, the Vice President for marketing at Quality Industries, concluded from market analysis that sales were dwindling for Quality's workbenches due to aggressive pricing by competitors. Quality's workbench sells for $1,140 whereas the competition's comparable workbench sells for $1,060. Yewell determined that a price drop to $1,060 would be necessary to protect its market share and maintain an annual sales level of 13,000 workbenches. Cost data based on sales of 13,000 workbenches: Budgeted Quantity Actual Quantity Actual Cost Direct materials (pounds) 175,000 168,000 \ 3,450,000 Direct labor (hours) 72,800 71,500 825,000 Machine setups (no. of setups) 900 880 250,000 Mechanical assembly (machine hours) 273,000 281,250 3,750,000 The current cost per unit is (rounded to the nearest whole dollar):

Throughput margin is defined as sales less:

Electronic Component Company (ECC) is a producer of high-end video and music equipment. ECC currently sells its top of the line "ECC" video player for a price of $250. It costs ECC $210 to make the player. ECC's main competitor is coming to market with a new video player that will sell for a price of $220. ECC feels that it must reduce its price to $220 in order to compete. The sales and marketing department of ECC believes the reduced price will cause sales to increase by 15%. ECC currently sells 200,000 video players per year. Assuming sales and marketing are not correct in their estimation and the volume of sales is not changed and ECC meets the competitive price, what is the target cost if ECC wants to maintain its same income level?

Suzy Co. produces and sells three products (X, Y, and Z). The following data relate to the three products: X Y Z Demand in units 160 150 140 Selling price per unit \ 130 \ 160 \ 150 Raw materials costs per unit \ 65 \ 80 \ 90 Labor time in minutes per unit 10 20 10 Which is the most profitable product if there is a constraint on labor time, so that total demand for all products cannot be met?

Johnson Marine has the following costs and expected sales for the coming year. Johnson is considering a number of different methods to determine the price of its product. Total Costs Variable Manufacturing \ 2,350,000 Variable Selling and Administrative 750,000 Plant-level Fixed Overhead 1,200,000 Fixed Selling and Administrative 600,000 Batch-level Fixed Overhead 200,000 Total Investment in Product Line 10,000,000 Expected Sales (units) 20,000 If Johnson determines price using a 40% markup of full manufacturing cost, the price is:

Amanda Jones owns and operates Motorcycle Rentals Inc.(MRI).Customers can rent a motorcycle in one city and then return it at one of three designated cities.Following are the costs involved in providing this service each year: Motorcycle Rentals Inc.began business two years ago with a $400,000 expenditure for a fleet of 45 motorcycles.These are expected to last five more years, at which time a new fleet will be purchased.Jeremy is satisfied with the steady average rentals per year of 10,000. Required: 1.What price should Jeremy charge per rental for the business to make a twenty percent life cycle profit? 2.What price should Jeremy charge per rental for the business to make a before-tax thirty percent return on investment?

The management accountant at Iang Manufacturing Co.collected the following data in preparation for a life-cycle analysis on one of its products, a leaf blower: Average Change Annual Over Change Over This Last the Last Item Year Four Years Year Annual sales \ 2,700,000 +1.8\% +23.5\% Unit sales price 450 +2.4\% +8.3\% Unit profit 100 -1.0\% +3.0\% Total profit 600,000 -1.2\% +30.0\% The stage of the sales life cycle the product is in is:

PureSwing Golf, Inc.manufactures swing analyzer systems for golf instructors.Two of its systems, Pure1000 and the Pure 5000 have these characteristics: The Pure1000 sells for $1,000 installed and the Pure5000 sells for $1,750 installed. Required: 1.What are the current profit margins on both systems? 2.PureSwing's management believes that it must drop the price on the Pure1000 to $800 and on the Pure5000 to $1,450 to remain competitive in the market.Recalculate profit margins for both products at these price levels. 3.Describe two ways that PureSwing could cut its costs to get the profit margins back to their original levels.

Caldwell Company desires to enter a market with a new product. As part of this process the following tasks will be performed: ● Determine a desired profit margin. ● Use Kaizen costing. ● Design and engineer the product. ● Determine the product's cost. ● Determine the suggested selling price. Which task would Caldwell Company perform first if it plans to use target costing?

Lens Care Inc. (LCI) manufactures specialized equipment for polishing optical lenses. There are two models - one mainly used for fine eyewear (F-32) and another for lenses used in binoculars, cameras, and similar equipment (B-13). The manufacturing cost of each unit is calculated using activity-based costing, using the following manufacturing cost pools: If the market price for B-13 and F-32 are reduced to $1,695 and $1,095 respectively, and Lens Care wants to maintain market share and profitability, what is the target cost for B-13 and F-32 (round to nearest whole dollar)?

Bakker Industries sells three products (611, 613, and 615) that it manufactures in four departments. Both labor and machine time are applied to products in each of the four departments. The machine-processing and labor skills required in each department prohibit switching either machines or labor from one department to another. However, Bakker has a good supply of both full-time and part-time labor and does not expect hiring or retention of employees to be a problem. Because of the availability of part-time labor, Bakker considers labor a variable cost and includes it in the calculation of throughput margin. Bakker's management is planning its production schedule for the next several months. Some machines will be out of service for extensive overhauling. Available machine times by department for each of the next six months are as follows: Labor and machine specifications per unit of product are as follows: The Sales Department's forecast of product demand over the next six months is as follows: Bakker's inventory levels will not increase or decrease during the next six months.The unit price and cost data valid for the coming six months are as follows: Required: 1.Determine whether Bakker can meet the monthly sales demand for the three products.What department, if any, is a constraint? 2.What monthly production schedule would be best for Bakker Industries?

Bryan Inc. produces a specialty top-quality juice machine. The product, the JM50, requires four processes to be completed. Specifically, these processes are exterior construction, pulp filter insertion, painting, and packaging. Each process is performed at separate workstations with different completion rates: Exterior construction can manufacture 100,000 juicer exteriors per day. Pulp filter insertion can install 25,000 filters every 6 hours. Painting can decorate 3,000 juicers every half hour. Packaging can package 5,000 juicers per hour. The plant operates 24/7, 24 hours a day every day of the week. Which function(s) is/are the bottleneck(s)? (Assume an average 30-day month.)