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

Question 1

Do cost management practices change over the product's sales life cycle Explain how.

Answer 1

Sales life cycle
Every company is known for the sale of the product and more sales result to more revenue to the organization. It is a sequences of various phases in the product or service life. Sales set the way for the firm, there are various steps or phases involved in the sales life cycle. Every product have different cycle some companies have more sale cycle and some are less depends upon the nature of the product, technology used, cost factor involvement, pricing factor of the product, and the competitors strategy. All these depends upon the life cycle of the sales.
Cost management
It also plays an important role in the determination of the price of the product that is more will be the cost more will be the price of the product and less will be the profit. So every company trying to control over the cost or take efforts to reduction in the cost by applying value engineering to the product. So that product available to the customer at lower price with value added.
These are the various cost control technique used under the cost management which any have effect on the product sales life cycle:
First is the planning of the project budget
Proper keeping of the cost track help to control over the cost
Effective time management plays an important role on the ground that time overrun make the cost overrun.
Phases of sales life cycle
There are various phases of the sales life cycle like
Introduction:
Under this stage product or services are introduced in the market, it is the initial stage for the product that is introductory stage.
Growth:
This stage consist of growth in the volume of the sales, it means companies product are like by the people of the country.
Maturity :
At this levels sales at the peak level that is company achieving the highest position with maximum market shares.
Decline:
It is final stage which comes after maturity that is sales decline by passing of the time. At this stage sale fall due to various reason and company find the reason to decline the sales.
Price is set in the market by observing the cost of the product and the desired profit required by the organization. So if the cost is under control then price will be lower and accordingly company will earned at huge at the initial levels that is reached at the maturity levels. But if the cost of the product is very high then automatically price will be more and demand decline in the market due to high price and sales effected and down at the initial stage.
So cost set the phase of the sales life cycle if the cost is less than company reaches at the top at the earliest that is at the maturity stage compared to more cost of the product on the ground that if cost is less price is less and more sales of the product. So all are interrelated concept and finally affect the different phases of the product sales life cycle.

Question 2

The firm in Brief Exercise 13-20 ignores competitive prices because it has a differentiated product. It uses full manufacturing cost-based pricing with a 40% markup. What is the firm's price

Answer 2

"The full manufacturing cost plus a markup is the most common form of pricing where a fixed percentage is added on the total manufacturing cost for the unit price of a product.
Thus the formula for determination of the firm price can be defined as below:
.
This pricing strategy ignores the customer demand and also the competitor prices. It is often used by retailers for pricing their products."
Calculation of the total manufacturing cost per unit of the product:
It is given as $38 to be the manufacturing cost which includes $22 as the fixed cost and $16 as the variable cost.
Calculation of the profit margin of the product:
It is given as 40% mark up on the total manufacturing cost.
Calculation of the Firm's Price:
Hence the price of the firm as determined is $53.20 per unit.

Question 3

Life-Cycle Pricing Matt Simpson owns and operates Quality Craft Rentals, which offers canoe rentals and shuttle service on the Nantahala River. Customers can rent canoes at one station, enter the river there, and exit at one of two designated locations to catch a shuttle that returns them to their vehicles at the station they entered. Following are the costs involved in providing this service each year:

Quality Craft Rentals began business three years ago with a $21,000 expenditure for a fleet of 30 canoes. These are expected to last seven more years, at which time a new fleet must be purchased.
Required Matt is happy with the steady rental average of 6,400 per year. For this number of rentals, what price should he charge per rental for the business to make a 20% life-cycle return on investment

Answer 3

Total variable costs $2.50 +.50 +.50 = $3.50
Life-Cycle Costs =  
$ 21,000 for fleet of canoes
446,200 (annual fixed costs x 10 years)
224,000 ($3.50 var. costs x 6,400 rentals per yr x 10 years)
691,200
Life-Cycle Revenues needed for 20% profit margin = $691,200 / 0.80 = $864,000
Price per Rental for 20% profit margin = $864,000 / 64,000 rentals in ten years = $13.50

Question 4

What does the concept of value engineering mean How is it used in target costing

Question 5

The firm in Brief Exercise 13-20 ignores competitive prices because it has a differentiated product. It uses cost life cycle-based pricing with a 10% markup. What is the firm's price

Question 6

Target Costing in a Service Firm UR Safe Systems installs home security systems. Two of its systems, the ICU 100 and the ICU 900, have these characteristics:

The ICU 100 sells for $810 installed, and the ICU 900 sells for $1,520 installed.
Required
1. What are the current profit margins on both systems
2. UR Safe's management believes that it must drop the price on the ICU 100 to $750 and on the ICU 900 to $1,390 to remain competitive in the market. Recalculate profit margins for both products at these price levels.
3. Describe two ways that UR Safe could cut its costs to get the profit margins back to their original levels.

Question 7

For what types of firms is target costing most appropriate and why

Question 8

Comdex Inc. manufactures parts for the telecom industry. One of its products that currently sells for $160 is now facing a new competitor that offers the same product for $140. The parts currently cost Comdex $130. Comdex believes it must reduce its price to $140 to remain competitive. What is the target cost of the product if Comdex desires a 25% profit on sales dollars

Question 9

Target Costing; Review of Chapter 11 Morrow Company is a large manufacturer of auto parts for automakers and parts distributors. Although Morrow has plants throughout the world, most are in North America. Morrow is known for the quality of its parts and for the reliability of its operations. Customers receive their orders in a timely manner and there are no errors in the shipment or billing of these orders. For these reasons, Morrow has prospered in a business that is very competitive, with competitors such as Delphi, Visteon, and others.
Morrow just received an order for 100 auto parts from National Motors Corp., a major auto manufacturer. National proposed a $1,500 selling price per part. Morrow usually earns 20% operating margin as a percent of sales. Morrow recently decided to use target costing in pricing its products. An examination of the production costs by the engineers and accountants showed that this part was assigned a standard full cost of $1,425 per part (this includes $1,000 production, $200 marketing, and $225 general and administration costs per part). Morrow's Value Assessment Group (VAG) undertook a cost reduction program for this part. Two production areas that were investigated were the defective unit rate and the tooling costs. The $1,000 production costs included a normal defective cost of $85 per part. Group leaders suggested that production changes could reduce defective cost to $25 per part.
Forty-five tools were used to make the auto part. The group discovered that the number of tools could be reduced to 30 and less expensive tools could be used on this part to meet National's product specifications. These changes saved an additional $105 of production cost per part. By studying other problem areas, the group found that general and administration costs could be reduced by $50 per unit through use of electronic data interchange with suppliers and just-in-time inventory management.
In addition, Morrow's sales manager told the group that National might be willing to pay a higher selling price because of Morrow's quality reputation and reliability. He believed National's proposed price was a starting point for negotiations. Of course, National had made the same offer to some of Morrow's competitors.
Required
1. What should be Morrow's target cost per auto part Explain.
2. As a result of the Value Engineering Group's efforts, determine Morrow's estimated cost for the auto part. Will Morrow meet the target cost for the part Do you recommend that Morrow take National's offer Explain your reasons.
(Adapted from a problem by Joseph San Miguel)

Question 10

What is life-cycle costing Why is it used

Question 11

If a customer order is placed on May 1, the company expects to begin processing it on May 10, and the order is shipped on May 20, the cycle time is then how many days long

Question 12

Target Costing; Health Care VIP-MD is a health maintenance organization (HMO) located in North Carolina. Unlike the traditional fee-for-service model that determines the payment according to the actual services used or costs incurred, VIP-MD receives a fixed, prepaid amount from subscribers. The per member per month (PMPM) rate is determined by estimating the health care cost per enrollee within a geographic location. The average health care coverage in North Carolina costs $368 per month, which is the same amount irrespective of the subscriber's age. Because individuals are demanding quality care at reasonable rates, VIP-MD must contain its costs to remain competitive. A major competitor, National Physicians, is entering the North Carolina market in early 2016 with a monthly premium of $325. VIP-MD wants to maintain its current market penetration and hopes to increase its enrollees in 2016. The latest data on the number of enrollees and the associated costs follow:

Required
1. Calculate the target cost required for VIP-MD to maintain its current market share and profit per enrollee in 2016.
2. Costs in the health care industry applicable to VIP-MD and National Physicians are expected to increase by 7% in the coming year, 2017. VIP-MD is planning for the year ahead and is expecting all providers, including VIP-MD and National Physicians, to increase their rates by $25 to $350. Calculate the new target cost assuming again that VIP-MD wants to maintain the same profit per enrollee as in 2016.

Question 13

Name the five steps of the theory of constraints and explain the purpose of each. Which is the most important step and why

Question 14

If Toyota Motor Company receives an order on May 1, begins production on May 19, and ships the order on May 20 immediately following production, then what is the manufacturing cycle efficiency (MCE) ratio

Question 15

Target Cost; Warehousing Caldwell Supply, a wholesaler, has determined that its operations have three primary activities: purchasing, warehousing, and distributing. The firm reports the following operating data for the year just completed:

Caldwell buys 100,000 units at an average unit cost of $10 and sells them at an average unit price of $20. The firm also has a fixed operating cost of $250,000 for the year.
Caldwell's customers are demanding a 10% discount for the coming year. The company expects to sell the same amount if the demand for price reduction can be met. Caldwell's suppliers, however, are willing to give only a 2% discount.
Required Caldwell has estimated that it can reduce the number of purchasing orders to 680 and can decrease the cost of each shipment $3 with minor changes in its operations. Any further cost savings must come from reengineering the warehousing processes. What is the maximum cost (i.e., target cost) for warehousing if the firm desires to earn the same amount of profit next year

Question 16

What does the term constraint mean in the theory of constraints analysis

Question 17

If customer demand is 200,000 units per month, and available manufacturing capacity is 6,000 hours per week, what is the Takt time for this firm

Question 18

Target Costing; International Harpers, Ltd., is a U.K. manufacturer of casual shoes for men and women. It has sustained strong growth in the U.K. market in recent years due to its close attention to fashion trends. Harpers's shoes also have a good reputation for quality and comfort. To expand the business, Harpers is considering introducing its shoes to the U.S. market, where comparable shoes sell for an average of $90 wholesale, more than $16 above what Harpers charges in the United Kingdom (average price, £45). Management has engaged a marketing consultant to obtain information about what features U.S. consumers seek in shoes if they desire different features. Harpers also has obtained information on the approximate cost of adding these features:

The current average manufacturing cost of Harpers's shoes is £34 (approximately $56 U.S.), which provides an average profit of £11 ($18 U.S.) per pair sold. Harpers would like to maintain this profit margin; however, the firm recognizes that the U.S. market requires different features and that shipping and advertising costs would increase approximately $10 U.S. per pair of shoes.
Required
1. What is the target manufacturing cost for shoes to be sold in the United States
2. Which features, if any, should Harpers add for shoes to be sold in the United States
3. Strategically evaluate Harpers's decision to begin selling shoes in the United States.

Question 19

What is the role of the flow diagram in the theory of constraints analysis

Question 20

Why do prices at theme parks in Orlando, Florida, remain high despite seasonal and economic cyclical ups and downs What type of strategic pricing is used by these theme parks

Question 21

Target Costing; Quality Function Deployment (QFD) Hilton Yacht manufactures a line of family cruiser/racing sailboats. The boats are well known for their quality, safety, and performance. Hilton hired Matthew Perry, a well-known sailboat designer and racer, to design a new sailboat, the M33. The M33 will have advanced materials in the hull and rigging to enhance the safety and performance of the boat and also to improve its overnight comfort. Safety and comfort are the two most important boat-buying criteria of Hilton's customers, rated at 34% and 33% respectively, on a 100-point scale. The other two criteria are performance (20%) and styling (13%). The overall length of the boat is about 33 feet; its two sleeping areas have room for five or six people. Hilton projects a sale price of approximately $200,000 and estimates the costs of manufacturing the M33 as shown in Table 1.
Table 1

A team of engineers and sales managers studied the projected cost and identified how each component of the planned boat contributed to satisfying customers' criteria. The results of this study, based on careful estimates, are shown in Table 2. For example, the estimates show that 30% of customers' desire for safety is satisfied by the construction of the hull and keel, another 30% by the standing rig, and so on.
Table 2

Required
1. Using the information in Table 2 developed by the team of engineers and sales managers, together with the customer criteria, determine which components of the boat are most important to customers, and why.
2. Take your findings in requirement 1 and compare them against the target cost figures in Table 1. What conclusions can you draw from this comparison

Question 22

What is the main difference between activity-based costing and the theory of constraints When is it appropriate to use each one

Question 23

Target Costing MaxiDrive manufactures a wide variety of parts for recreational boating, including a gear and driveshaft part for high-powered outboard boat engines. Original equipment manufacturers such as Mercury and Honda purchase the components for use in large, powerful outboards. The part sells for $610, and sales volume averages 25,000 units per year. Recently, MaxiDrive's major competitor reduced the price of its equivalent unit to $550. The market is very competitive, and Maxi-Drive realizes it must meet the new price or lose significant market share. The controller has assembled these cost and usage data for the most recent year for MaxiDrive's production of 25,000 units:

Required
1. Calculate the target cost for maintaining current market share and profitability.
2. Can the target cost be achieved How

Question 24

Target Costing; Quality Function Deployment Bridal Photography Inc. (BPI) specializes in preparing wedding pictures, including a large book of photos for the wedding couple. Each BPI couple works directly with a single BPI photographer who helps the couple plan the photos to be made on the wedding day, select the wedding photo book, and choose the photos it is to contain. The standard fee for each wedding is $6,000, which includes all of the firm's services, including the book of wedding photos. BPI is experiencing increased competition, especially based on price. BPI wants to protect its reputation and to continue to expand its business, and for this purpose it has decided to use quality function deployment (QFD) to better understand the cost and value trade-offs in its business. As a first step, BPI defined the four key "buying criteria" that couples use in choosing and evaluating photographers: (1) fast service, (2) great photos at the wedding, (3) quality of the photo finishing (color, clarity... ), and (4) the quality of the photo book. A select sample of prior customers was asked to rate these criteria and, on a 300-point scale, they provided scores of 30, 120, 60, and 90, respectively.
The BPI accounting records showed the average weekly cost of $5,000 could be traced to four activities: (1) a planning meeting in which the couple and the photographer determined what types of photos were desired, set dates for the photography and proofs, etc., (2) photography on the wedding day, (3) preparation of proofs from which the couple would select the photos to be used in the book, and (4) preparation of the final photos and the wedding photo book. The average costs of the four activities were $800, $2,400, $600, and $1,200, respectively.
As a final step, BPI managers, photographers, and staff worked together to determine an estimate of the contribution of each of the four activities to achieving the buying criteria. The results were as follows:

Required
1. Determine which activities are most valuable to the wedding couple and compare this finding to the cost of the activities. Which activities should be given greater attention in time and cost, and which should be given less time and cost
2. Indicate some business and competitive issues that should be taken into account in considering your answer to requirement 1 above.

Question 25

For what types of firms is the theory of constraints analysis most appropriate and why

Question 26

Target Costing; Spreadsheet Application Bowman Specialists Inc. (BSI) manufactures specialized equipment for polishing optical lenses. There are two models-one (A-25) principally used for fine eyewear and the other (A-10) for lenses used in binoculars, cameras, and similar equipment.
The manufacturing cost of each unit is calculated, using activity-based costing, for these manufacturing cost pools:

BSI currently sells the A-10 model for $1,050 and the A-25 model for $725. Manufacturing costs and activity usage for the two products follow:

Required
1. Calculate the product cost and product margin for each product.
2. A new competitor has entered the market for lens-polishing equipment with a superior product at significantly lower prices, $825 for the A-10 model and $595 for the A-25 model. To try to compete, BSI has made some radical improvements in the design and manufacturing of its two products. The materials costs and activity usage rates have been decreased significantly:

Calculate the total product costs with the new activity usage data. Can BSI make a positive gross margin with the new costs, assuming that it must meet the price set by the new competitor
3. Assume the information in requirement 2, but further assume that BSI management is not satisfied with the gross margin on the A-10 after the cost improvements. BSI wants a $50 gross margin on A-10. Suppose you are able to change the number of parts to reduce costs further to achieve the desired $50 margin. How much would the number of parts have to change to provide the desired gross margin ( Hint: Use the Excel Goal Seek function.)
4. What cost management method might be useful to BSI at this time, and why

Question 27

Theory of Constraints; Strategy Colton Furniture Co. is a small but fast-growing manufacturer of living room furniture. Its two principal products are end tables and sofas. The flow diagram for the manufacturing at Colton follows. Colton's manufacturing involves five processes: cutting the lumber, cutting the fabric, sanding, staining, and assembly. One employee cuts fabric and two do the staining. These are relatively skilled workers who could be replaced only with some difficulty. Two workers cut the lumber, and two others perform the sanding operation. There is some skill to these operations, but it is less critical than for staining and fabric cutting. Assembly requires the lowest skill level and is currently done by one full-time employee and a group of part timers who provide a total of 175 hours of working time per week. The other employees work a 40-hour week, with 5 hours off for breaks, training, and personal time. Assume a four-week month and that, by prior agreement, none of the employees can be switched from one task to another. The current demand for Colton's products and sales prices are as follows, although Colton expects demand to increase significantly in the coming months if it is able to successfully negotiate an order from a motel chain.


Required
1. What is the most profitable production plan for Colton Explain your answer with supporting calculations.
2. How would you apply the five steps of the theory of constraints to Colton's manufacturing operations What would you recommend for each step

Question 28

How important is product design in life-cycle costing Why

Question 29

Target Costing in a Service Firm Take-a-Break Travel Company offers spring break travel packages to college students. Two of its packages, a seven-day, six-night trip to Cancun and a five-day, four-night trip to Jamaica, have the following characteristics:

The Cancun trip sells for $750, and the Jamaica trip sells for $690.
Required
1. What are the current profit margins on both trips
2. Take-a-Break's management believes that it must drop the price on the Cancun and Jamaica trips to $710 and $650, respectively, in order to remain competitive in the market. Recalculate profit margins for both packages at these price levels.
3. Describe two ways that Take-a-Break Travel could cut its costs to get the profit margins back to their original levels.

Question 30

Theory of Constraints Chemical Products Company (CPC) produces a variety of chemicals, primarily adhesives, lubricants, and polymers for industrial use by manufacturers to produce plastics and other compounds. Don Leo, the production vice president, has been informed of a disturbing trend of increasing customer complaints regarding late deliveries from the Canton, Kentucky, plant. The Canton plant is one of the firm's newest and most modern plants and is dedicated to the manufacture of two products, Polymer 1 and Polymer 2. Don has downloaded some incomplete recent information about the Canton plant onto his laptop; he plans to analyze the information in the hour or so he has before his next meeting of the CPC executive committee. He is concerned that some comments will be made about the problems at Canton, and he wants to have an idea of how to respond. Because CPC views Polymer 1 and Polymer 2 as very promising in terms of both sales and profit potential, the news of these problems is likely to spark some comment. The data downloaded by Don are as follows:

Don has sketched the following flow diagram for the Canton plant. He believes it is relatively accurate because of his frequent contact with the plant.

Required Prepare a set of notes that Don can use in the executive meeting if questions come up about the problems at the Canton plant.

Question 31

For what types of firms is life-cycle costing most appropriate and why

Question 32

Target Costing Using Quality Function Deployment (QFD) Rick's is a popular restaurant for fine dining. The owner and chef, Rick Goetz, is pleased with his success and is now considering expanding his existing restaurant or perhaps opening a second restaurant. Before making his decision, Rick wants to find out more about his competitive position. There are three other restaurants that compete directly with him on food quality and price. Rick knows that his profitability depends on his ability to provide a satisfying meal at the market price. His first step was to gather some information about his customers, using an independent market research firm, which informed him that his customers were looking for taste, comfort (the ambiance, service, and overall presentation of the food), and enjoyment (the distinctiveness of the dining experience, a degree of excitement). He was surprised to find that comfort and enjoyment ranked highest.

Next, he worked with his key wait staff and chefs to try to identify the three main components, and related cost, of the service Rick's provided:

Having the customer criteria and components, Rick now again worked with his staff to assess how each component contributed to the desired customer criteria.

Required
1. Using the information Rick has developed, determine the importance index for each component (menu and food preparation, wait staff, and food ingredients).
2. Compare your findings in requirement 1 to the cost of the components. What conclusions can you draw from this comparison

Question 33

Theory of Constraints for a Restaurant Taylor's is a popular restaurant that offers customers a large dining room and comfortable bar area. Taylor Henry, the owner and manager of the restaurant, has seen the number of patrons increase steadily over the last two years and is considering whether and when she will have to expand its available capacity. The restaurant occupies a large home, and all the space in the building is now used for dining, the bar, and kitchen, but space is available to expand the restaurant. The restaurant is open from 6 p.m. to 10 p.m. each night (except Monday) and has an average of 24 customers enter the bar and 50 enter the dining room during each of those hours. Taylor has noticed the trends over the last two years and expects that within about four years the number of bar customers will increase by 50% and the dining customers will increase by 20%. Taylor is worried that the restaurant will be not be able to handle the increase and has asked you to study its capacity. In your study you consider four areas of capacity: the parking lot (which has 80 spaces), the bar (54 seats), the dining room (100 seats), and the kitchen. The kitchen is well staffed and can prepare any meal on the menu in an average of 12 minutes per meal. The kitchen when fully staffed is able to have up to 20 meals in preparation at a time, or 100 meals per hour (60 min./12 min. × 20 meals). To assess the capacity of the restaurant, you obtain the additional information:
• Diners typically come to the restaurant by car with an average of 3 persons per car, while bar patrons arrive with an average of 1.5 persons per car.
• Diners on the average occupy a table for an hour while bar customers usually stay for an average of two hours.
• Due to fire regulations, all bar customers must be seated.
• The bar customer typically orders two drinks at an average of $7 per drink; the dining room customer orders a meal with an average price of $22; the restaurant's cost per drink is $1, and the direct costs for meal preparation are $5.
Required (Note: When calculating capacity usage, you may round numbers up to the nearest whole digit.)
1.
a. Given the current number of customers per hour, what is the amount of excess capacity in the bar, dining room, parking lot, and kitchen
b. Calculate the expected total throughput margin for the restaurant per hour, day, and month (assuming a 26-day month).
2.
a. Given the expected increase in the number of customers, determine if there is a constraint for any of the four areas of capacity. What is the amount of needed capacity for each constraint
b. If there is a constraint, reduce the demand on the constraint so that the restaurant is at full capacity (assume some customers would have to be turned away). Calculate the expected total throughput margin for the restaurant per hour, day, and month (assuming a 26-day month).
3. Taylor has obtained construction estimates. To increase the capacity of the bar to 80 seats, the dining room to 120 seats, and the kitchen to 25 meals at the same time would cost $250,000, which Taylor could finance for $5,000 per month for the next four years. There would be no change to the parking lot. Given your analysis above, prepare a brief recommendation to Taylor regarding expanding the restaurant.

Question 34

Explain the difference in intended application between strategic pricing and life-cycle costing.

Question 35

Manufacturing Cycle Efficiency Waymouth Manufacturing operates a contract manufacturing plant located in Dublin, Ireland. The plant provides a variety of electronics products and components to consumer goods manufacturers around the world. Cycle time is a critical success factor for Waymouth, which has developed a number of measures of manufacturing speed. Waymouth has studied the matter and found that competitive contract manufacturers have manufacturing cycle times (MCE) of about 40%. When last calculated, Waymouth's MCE was 35%.
Key measures from the recent month's production, averaged over all the jobs during that period, are as follows:

Required Determine the manufacturing cycle efficiency (MCE) for the recent month. What can you infer from the MCE you calculated

Question 36

Life-Cycle Costing Kate Stephens, the COO of BioDerm, has asked her cost management team for a product-line profitability analysis for her firm's two products, Xderm and Yderm. The two skin care products require a large amount of research and development and advertising. After receiving the following statement from BioDerm's auditor, Kate concludes that Xderm is the more profitable product and that perhaps cost-cutting measures should be applied to Yderm.

Required
1. Explain why Kate may be wrong in her assessment of the relative performance of the two products.
2. Suppose that 75% of the R D and selling expenses are traceable to Xderm. Prepare life-cycle income statements for each product. What does this tell you about the importance of accurate life-cycle costing
3. Consider again your answers in requirements 1 and 2 with the following additional information. R D and selling expenses are substantially higher for Xderm because it is a new product. Kate has strongly supported development of the new product, including the high selling and R D expenses. She has assured senior managers that the Xderm investment will pay off in improved profits for the firm. What are the ethical issues, if any, facing Kate as she reports to top management on the profitability of the firm's two products

Question 37

What is target costing

Question 38

How is Takt time calculated and what is it used for

Question 39

Takt Time Johnson Electronics manufactures a power supply used in a variety of electronic, products, including printers, modems, and routers. The demand for the part is 8,400 units per week. The production of the power supply requires six different manufacturing operations, each in sequence and each having the following processing times. The net available time to work is 70 hours per week, using two shifts.

Required
1. What is the Takt time for this product
2. Is the processing line properly balanced for this product Why or why not
3. What is the strategic role of Takt time, and how is it implemented by the cost management analyst

Question 40

Life-Cycle Costing; Health Care; Present Values Forever Young, Inc., has developed a drug that will diminish the effects of aging. Forever Young has spent $1,000,000 on research and development and $2,108,000 for clinical trials. Once the drug is approved by the FDA, which is imminent, it will have a five-year sales life cycle. Laura Russell, Forever Young's chief financial officer, must determine the best alternative for the company among three options. The company can choose to manufacture, package, and distribute the drug; outsource only the manufacturing; or sell the drug's patent. Laura has compiled the following annual cost information for this drug if the company were to manufacture it:

Management anticipates a high demand for the drug and has benchmarked $245 per unit as a reasonable price based on other drugs that promise similar results. Management expects sales volume of 3,000,000 units over four years and uses a discount rate of 10%.
If Forever Young; chooses to outsource the manufacturing of the drug while continuing to package, distribute, and advertise it, the manufacturing costs would result in fixed costs of $1,350,000 and variable cost per unit of $74. For the sale of the patent, Forever Young; would receive $300,000,000 now and $25,000,000 at the end of every year for the next four years.
Required Determine the best option for Forever Young. Support your answer.

Question 41

Explain the two methods for reducing total product costs to achieve a desired target cost. Which is more common in the consumer electronics industries In the specialized equipment manufacturing industries

Question 42

Distinguish pricing based on the cost life cycle and pricing based on the sales life cycle and give an example method for each.

Question 43

Life-Cycle Costing; Service Department In the chapter, we illustrated the use of the life-cycle concept for both the cost and sales life cycle of a company's product lines. It can also be useful to extend the cost life cycle to the service department. In Chapter 7, we were interested in the allocation of service department costs to product lines. Here we are interested in managing the costs of a service department over its life cycle. The information technology department (IT) is a good example. The costs incurred in IT have the following phases:
1. Acquire IT assets, including computers, hubs, cables, and other assets.
2. Acquire software and deploy IT for the desired application and functionality.
3. Maintain management and operations of the IT assets.
4. Provide user support.
5. Retire the assets on a planned schedule and replace as needed.
Required How can life-cycle costing help in the management of the IT department

Question 44

Constraint Analysis; Flow Diagram (Appendix) Silver Aviation assembles small aircraft for commercial use. The majority of its business is with small freight airlines serving areas whose airports do not accommodate larger planes. The remainder of Silver's customers are commuter airlines and individuals who use planes in their businesses, such as the owners of larger ranches. Silver recently expanded its market into Central and South America, and the company expects to double its sales over the next three years.
To schedule work and track all projects, Silver uses a flow diagram. The diagram for the assembly of a single cargo plane is shown in Exhibit 1. The diagram shows four alternative paths with the critical path being ABGEFIJ. Bob Peterson, president of Coastal Airlines, recently placed an order with Silver Aviation for five cargo planes. During contract negotiations, Bob agreed to a delivery time of 13 weeks (five work days per week) for the first plane with the balance of the planes being delivered at the rate of one every 4 weeks. Because of problems with some of the aircraft that Coastal is currently using, Bob contacted Grace Vander, sales manager for Silver Aviation, to ask about improving the delivery date of the first cargo plane. Grace replied that she believed the schedule could be shortened by as much as 10 work days or 2 weeks, but the cost of assembly would increase as a result. Bob said he would be willing to consider the increased costs, and they agreed to meet the following day to review a revised schedule that Grace would prepare.
Because Silver Aviation previously assembled aircraft on an accelerated basis, the company has a list of costs for this purpose. Grace used the data shown in Exhibit 2 to develop a plan to cut 10 working days from the schedule at a minimum increase in cost to Coastal Airlines. Upon completing her plan, she reported to Bob that Silver would be able to cut 10 working days from the schedule for an associated increase in cost of $6,600. Grace's Exhibit 3 shows an accelerated assembly schedule for the cargo plane starting from the regularly scheduled days and cost.
Required
1. Is Grace's plan satisfactory Why or why not
2. Revise the accelerated assembly schedule so that Coastal Airlines will take delivery of the first plane ahead of schedule at the least incremental cost to Coastal.
3. Calculate the incremental costs that Bob will have to pay for this revised accelerated delivery.
4. How might Silver Aviation use the information in Exhibits 1 and 2 to its competitive advantage
(CMA Adapted)
EXHIBIT 1 Flow Diagram for Plane Assembly

EXHIBIT 2 Crash Cost Listing

EXHIBIT 3 Accelerated Plane Assembly Schedule

Question 45

What does the term sales life cycle mean What are the phases of the sales life cycle How does it differ from the cost life cycle

Question 46

At what phase in the product sales life cycle will prices likely be the highest: introduction, growth, maturity, or decline

Question 47

Pricing Williams Inc. produces a single product, a part used in the manufacture of automobile transmissions. Known for its quality and performance, the part is sold to luxury auto manufacturers around the world. Because this is a quality product, Williams has some flexibility in pricing the part. The firm calculates the price using a variety of pricing methods and then chooses the final price based on that information and other strategic information. A summary of the key cost information follows. Williams expects to manufacture and sell 50,000 parts in the coming year. While the demand for Williams's part has been growing in the past two years, management is not only aware of the cyclical nature of the automobile industry but also concerned about market share and profits during the industry's current downturn.

Required
1. Determine the price for the part using a markup of 45% of full manufacturing cost.
2. Determine the price for the part using a markup of 25% of full life-cycle cost.
3. Determine the price for the part using a desired gross margin percentage to sales of 40%.
4. Determine the price for the part using a desired life-cycle cost percentage to sales of 25%.
5. Determine the price for the part using a desired before-tax return on investment of 15%.
6. Determine the contribution margin and operating profit for each of the methods in requirements 1 through 5. Which price would you choose, and why

Question 48

Research Assignment; Sustainability and the Supply Chain Obtain from your library a copy of the following article: Hau L. Lee, "Don't Tweak Your Supply Chain-Rethink It End to End," Harvard Business Review, October 2010, pp. 62-69. The article discusses the ways in which organizations might change the way they interact with supply chain members as they work toward improving their social and environmental impact.
Required After reading the previously referenced article, answer the following questions:
1. Why are organizations asking supply chain partners about their environmental and social performance
2. Generally speaking, who are the stakeholders that have an interest in improved environmental and social responsibility In developing your response, think in terms of the extended supply chain.
3. Define the term structural change. According to the authors of this article, why should companies undertake broader structural changes than most currently do
4. What role can management accountants play when improved environmental and social responsibility becomes a goal of an organization

Question 49

Do pricing strategies change over the different phases of the sales life cycle Explain how.

Question 50

The market price for a product has been $50 per unit, but competitive pressures have reduced the market price to $45. The firm manufactures 10,000 of these products per year at a manufacturing cost of $38 per unit (including $22 fixed cost and $16 variable cost per unit). Other selling and administrative costs for the product are $8 per unit. What is the firm's target manufacturing cost for this product if the profit per unit is to remain unchanged

Question 51

Pricing Military Contracts The Pentagon is constantly seeking ways to procure the most effective combat equipment and systems at the lowest possible cost. A key element in most procurement contracts is a fixed fee based on a percentage of the full cost for the contract, plus a percentage fixed fee that is incentive-based. The latter is based on meeting contract deadlines and meeting or exceeding other contract performance measures. An actual Pentagon contract with Boeing involved a 10% fixed fee on cost incurred and another 5%-of-incentive award.
Required Evaluate the compensation plan for this contract, with the fixed fee of 10% and the incentive fee of 5%. What do you think is the role of the incentive fee, and do you think it is too large or too small