Deck 1: Cost Management and Strategic Decision Making Evaluating Opportunities and Leading Change

Question 1

A cost-management system is the set of cost-management techniques that function together to support the organization's goals and activities.

Answer 1

True

Question 2

Cost management is a philosophy, an attitude, and a set of techniques aimed at generating the most revenues possible in a corporation.
ACIPA BB: Industry

Answer 2

False

Question 3

Cost accounting and cost management are the same functions and operations.

Answer 3

False

Question 4

Companies in the United States are required by law to follow the code of ethics developed by the Institute of Management Accountants (IMA).

Question 5

Strategy is an organization's overall plan or policy to achieve its goals.

Question 6

Two major questions asked in strategic decision making are "where"
and "who."

Question 7

Strategic decision making is not applicable in non-profit organizations because financial rewards do not exist for shareholders.

Question 8

The Value Chain is a set of linked operations or processes that begins in the manufacturing process of a company.

Question 9

Quantitative information is expressed in dollars or other quantities relating to size or frequency.

Question 10

The use of Internet-based information and Web sites for solicitations is an example of the customer service part of the value chain.

Question 11

The extended value chain encompasses the ways companies obtain their resources and distribute their products and services, possibly using the services of other organizations.

Question 12

Email response to customers' questions and complaints is an example of the customer service aspect of the value chain.

Question 13

The value chain is a set of activities within an organization beginning with the purchase of materials and ending with the completion of a finished product.

Question 14

Companies that outsource support services do not understand the concepts underlying the value chain.

Question 15

The ethical standard of confidentiality would prohibit Management Accountants from testifying in Court against their employers.

Question 16

Refraining from disclosing confidential information acquired in the course of their work is an example of the ethical standard of competence for Management Accountants.

Question 17

The first level of evaluating plans and outcomes is strategic performance analysis.

Question 18

Removing obstacles to change is an important feature of successful organizational change.

Question 19

The only primary processes in the value chain are research and development and design.

Question 20

Benefit-cost analysis is a technique for identifying opportunities for improvement and measuring the effects of proposed improvements by comparing both the costs and benefits of a proposal.

Question 21

Quantitative information is expressed only in dollars.

Question 22

Benefit-cost analysis takes into account only quantitative benefits and costs of proposed plans.

Question 23

Qualitative information is descriptive and based on characteristics or perceptions, such as relative desirability, rather than quantities.

Question 24

Cost managers almost always have training as accountants.

Question 25

Teams are replacing individual decision makers in many organizations.

Question 26

Management should emphasize long term success over short term achievements in creating a successful culture for organizational change.

Question 27

Cost Management teams often find that employees are sources of valuable information and suggestions in cost management review.

Question 28

Variances are the differences between a plan's actual and expected quantities.

Question 29

The ethical standard of competence states that Management Accountants have a responsibility to perform their professional duties in accordance with relevant laws, regulations and professional standards.

Question 30

Management accountants have a responsibility to communicate only unfavorable professional judgments or opinions.

Question 31

Quantitative information is always more important than qualitative information in benefit-cost analysis.

Question 32

Variance analysis will be primarily used in the quantitative aspect of performance evaluation.

Question 33

Which one of the following is not a characteristic of cost management?

A) Philosophy
B) Techniques
C) Strategy
D) Attitude

Question 34

Cross Functional Decision Making:

A) Brings together individuals from diverse functions and backgrounds in order to generate innovative solutions to problems
B) Brings together individuals from different industries to benchmark solutions to similar problems
C) Brings together individuals with different jobs in the same function to generate innovative solutions to problems
D) Focuses on finding new opportunities, informed but not restricted to what has worked in the past

Question 35

Promoting the idea of continually finding ways to help organizations make the right decisions to create more customer value at lower cost is an example of the characteristic of the:

A) Attitude of effective cost management
B) Variance analysis of effective cost management
C) Technique of effective cost management
D) Philosophy of effective cost management

Question 36

Which of the following is not a piece of qualitative information in a decision?

A) The effect of the decision on employees' morale
B) The effect of the decision on customer perception of service quality
C) The effect of the decision on the quality of the product produced
D) The total cost savings to be gained from the decision

Question 37

Maria Kadison, Controller at Robbins Corporation, became aware that Robbins is in talks with Hallion Company for a friendly merger. Maria discloses this information to her immediate family. No member of Maria's family purchases either Robbins' or Hallion's stock before the merger. Which of the following is True?

A) Maria has violated the ethical standard of integrity
B) Maria has violated the ethical standard of confidentiality
C) Maria has not violated any ethical standards because the disclosure was made only to her immediate family
D) Maria has not violated any ethical standards because her immediate family did not profit from the information that she disclosed

Question 38

Which of the following would be found in a high risk, high return strategic mission?

A) Focus on capturing market share
B) Focus on cutting costs
C) Need to minimize losses
D) Focus on finding buyer quickly

Question 39

Which of the following would be found in a low risk, low reward strategic mission?

A) Need to maintain growth
B) The company must be a major player in the market
C) Declining market
D) Focus on capturing market share

Question 40

Which of the following activities would be included in the value chain of a manufacturing company?

A) Research and Development
B) Customer Service
C) Design
D) All of the above are included in the value chain

Question 41

A company with a "hold"
Strategy as its strategic mission would focus on:

A) Minimizing losses
B) The market potential of new products
C) Maintaining its current rate of growth
D) Capturing market share

Question 42

The extended value chain:

A) Is a set of linked operations or processes that begins with obtaining resources and ends with providing products or services that customers value
B) Is a related set of tasks, manual or automated, that transforms inputs into identifiable outputs
C) Encompasses how companies obtain their resources and distribute their products and services, possibly using the services of other organizations
D) Is a technique for identifying opportunities for improvement and measuring the effects of proposed improvements by comparing both the costs and benefits of a proposal

Question 43

Which of the following would not be a member of a cross-functional team?

A) The lead engineer
B) The Chairman of the Board of Directors
C) The cost accounting manager from the accounting department
D) The supervisor of salespeople in marketing

Question 44

Which of the following would not be part of an organization's eight-step process for implementing change?

A) Identifying the need for change
B) Reinforcing a culture of more improvement and more effective management
C) Ensuring that long term achievements are emphasized over short term achievements
D) Creating a team to lead and manage the change

Question 45

The eight-step process for implementing change in a successful organization begins with:

A) Creating a vision of the change and a strategy for achieving the vision
B) Identifying the need for change
C) Encouraging innovation and removing obstacles to change
D) Reinforcing a culture of more improvement, better leadership and more effective management

Question 46

Use the following to answer questions:
Perry's Sandwich Department had the following summarized results for the month ending April 30:


-As the cost accountant, which single note to the above financial results is most appropriate in the report to management?

A) The departmental manager is performing to expectations because budgeted income equals actual income
B) Revenues are above budget and a bonus based on this increase should be considered
C) Costs as a percentage of revenues are above budget and a further scrutiny of the results might be appropriate
D) Costs are 17.5% above budget and the department manager's position should be critically evaluated by senior management

Question 47

Use the following to answer questions:
Perry's Sandwich Department had the following summarized results for the month ending April 30:


-If the budget were based on the sale of 13,000 sandwiches at $2.00 each and the actual results reflect the sale of 13,000 sandwiches, identify the most appropriate conclusion in the report to management

A) If costs as a percentage of revenues had remained at the budgeted level, net income would have declined
B) If costs as a percentage of revenues remain at the actual level any increase in revenues would probably . be matched by a decrease in departmental net income
C) If costs as a percentage of revenues had remained at the budgeted level, net income would be $492 above budget
D) If costs as a percentage of revenues had remained at the budgeted levels, net income would be $4,000 above budget

Question 48

Use the following to answer questions:
Perry's Sandwich Department had the following summarized results for the month ending April 30:


-If an additional 2,000 sandwiches were sold at the regular price, during additional store opening hours, identify the most appropriate conclusion in the report to management.

A) The budget should be updated to take into account the change
B) The additional hours should be canceled, as net income did not increase
C) An analysis of the differential costs of the additional store hours should be undertaken prior to drawing . a conclusion as to the success of the change
D) Both A and C above

Question 49

Use the following to answer questions:
Perry's Sandwich Department had the following summarized results for the month ending April 30:


-An example of a qualitative factor that should be considered in the benefit-cost analysis of opening the store for additional hours is:

A) The impact of employees' morale because of additional working hours on weekends required
B) The additional payroll taxes to be paid
C) Additional hours of the owner's time to be spent in the store
D) All of the above are considered qualitative factors

Question 50

Use the following to answer questions:
In the Management's Discussion and Analysis section of its 2005 annual report, the CEO of McDonald's Corporation discussed the strategic direction and financial performance of the company by referring
to the comprehensive revitalization plan initiated by the company in 2003: "in 2003, the Company initiated a comprehensive revitalization plan focused on maximizing customer satisfaction and strengthening our financial position. We redefined our strategy to emphasize growth through adding more customers to existing restaurants and aligned the System around our customer- focused Plan to Win. We streamlined processes such as new product development and restaurant operations, improved our training programs, and implemented performance measures, including a restaurant review and measurement process, to enable and motivate franchisees and restaurant employees to serve customers better." Among the improvements cited were:
(1) Improving the taste of many of the core offerings
(2) Streamlining processes such as new product development and restaurant operations
(3) Implemented performance measures to enable and motivate franchises to service customers better
(4) Achieved high levels of customer awareness worldwide
During 2005, McDonald's comparable sales increased 3.9%, earnings per share increased from $1.79 to $2.04, cash from operations increased $433 million to $4.3 billion and the company repurchased $1.2billion in common stock. (McDonald's 2005 Annual Report)

-McDonald's strategic mission could best be described as:

A) Build
B) Hold
C) Harvest
D) Divest

Question 51

Use the following to answer questions:
In the Management's Discussion and Analysis section of its 2005 annual report, the CEO of McDonald's Corporation discussed the strategic direction and financial performance of the company by referring
to the comprehensive revitalization plan initiated by the company in 2003: "in 2003, the Company initiated a comprehensive revitalization plan focused on maximizing customer satisfaction and strengthening our financial position. We redefined our strategy to emphasize growth through adding more customers to existing restaurants and aligned the System around our customer- focused Plan to Win. We streamlined processes such as new product development and restaurant operations, improved our training programs, and implemented performance measures, including a restaurant review and measurement process, to enable and motivate franchisees and restaurant employees to serve customers better." Among the improvements cited were:
(1) Improving the taste of many of the core offerings
(2) Streamlining processes such as new product development and restaurant operations
(3) Implemented performance measures to enable and motivate franchises to service customers better
(4) Achieved high levels of customer awareness worldwide
During 2005, McDonald's comparable sales increased 3.9%, earnings per share increased from $1.79 to $2.04, cash from operations increased $433 million to $4.3 billion and the company repurchased $1.2billion in common stock. (McDonald's 2005 Annual Report)

-Which of the improvements cited by McDonald's is an example of the extended value chain?

A) Number 1
B) Number 2
C) Number 3
D) Number 4

Question 52

Use the following to answer questions:
In the Management's Discussion and Analysis section of its 2005 annual report, the CEO of McDonald's Corporation discussed the strategic direction and financial performance of the company by referring
to the comprehensive revitalization plan initiated by the company in 2003: "in 2003, the Company initiated a comprehensive revitalization plan focused on maximizing customer satisfaction and strengthening our financial position. We redefined our strategy to emphasize growth through adding more customers to existing restaurants and aligned the System around our customer- focused Plan to Win. We streamlined processes such as new product development and restaurant operations, improved our training programs, and implemented performance measures, including a restaurant review and measurement process, to enable and motivate franchisees and restaurant employees to serve customers better." Among the improvements cited were:
(1) Improving the taste of many of the core offerings
(2) Streamlining processes such as new product development and restaurant operations
(3) Implemented performance measures to enable and motivate franchises to service customers better
(4) Achieved high levels of customer awareness worldwide
During 2005, McDonald's comparable sales increased 3.9%, earnings per share increased from $1.79 to $2.04, cash from operations increased $433 million to $4.3 billion and the company repurchased $1.2billion in common stock. (McDonald's 2005 Annual Report)

-Improvement number 3 is an example of which link in the value chain?

A) Supply
B) Research and Development
C) Customer Service
D) Production

Question 53

Match the following operations with appropriate elements of an organization's value chain. Value Chain Element

-Crate and Barrel's replies to customers' questions on merchandise.

A) Research and Development
B) Design
C) Supply
D) Production
E) Marketing
F) Distribution
G) Customer Service

Question 54

Match the following operations with appropriate elements of an organization's value chain. Value Chain Element

-Updating Pottery Barn's electronic Internet catalogue of sporting goods and spring merchandise.

A) Research and Development
B) Design
C) Supply
D) Production
E) Marketing
F) Distribution
G) Customer Service

Question 55

Match the following operations with appropriate elements of an organization's value chain. Value Chain Element

-Development of new software applications at Oracle.

A) Research and Development
B) Design
C) Supply
D) Production
E) Marketing
F) Distribution
G) Customer Service

Question 56

Match the following operations with appropriate elements of an organization's value chain. Value Chain Element

-Inspection of incoming chip parts at IBM.

A) Research and Development
B) Design
C) Supply
D) Production
E) Marketing
F) Distribution
G) Customer Service

Question 57

Match the following operations with appropriate elements of an organization's value chain. Value Chain Element

-Contracting with Federal Express to ship computers to customers at Gateway.

A) Research and Development
B) Design
C) Supply
D) Production
E) Marketing
F) Distribution
G) Customer Service

Question 58

Match the following operations with appropriate elements of an organization's value chain. Value Chain Element

-Writing of software programs at IBM's Lotus Division.

A) Research and Development
B) Design
C) Supply
D) Production
E) Marketing
F) Distribution
G) Customer Service

Question 59

Match the following operations with appropriate elements of an organization's value chain. Value Chain Element

-Creation of new movie ideas at Paramount Pictures

A) Research and Development
B) Design
C) Supply
D) Production
E) Marketing
F) Distribution
G) Customer Service

Question 60

The President of the company is considering adding sandwiches to the menu. Sales will be expected to increase by $60,000. The cost of sandwich supplies would be $30,000. Labor costs would increase 40% and other costs 10%. The current manager will continue to manage the operation.
Required:
(a) Prepare a quantitative analysis of the decision to add sandwiches to the menu.
(b) What qualitative considerations should the company consider in this decision?
C & P Frosties is a local ice cream shop. The company currently is showing an operating loss, as evidenced by the income statement below:

Question 61

The Callahans are considering moving to a town approximately 20 minutes away. Because of the desirability of the local schools and strict zoning, housing is very expensive in this town. Their daughter would attend public schools. The Facts estimate that their monthly mortgage, taxes and insurance would increase to $7,000 per month, while the cost of running automobiles would increase 20% and other utilities 10%. Mortgage interest costs are tax deductible and the Facts are in the 25% tax bracket. Assume that $700 of the increase in their monthly budget is for mortgage interest. What are the costs and benefits of moving? Which can be quantified and which cannot?
The Callahan family currently lives in a suburb of a major city. They have a lovely home close to major routes of transportation. Both Mr. and Mrs. Callahan have convenient commutes of 30 minutes or less. Because the school system in their town does not have a quality reputation, they currently send their daughter to private school, conveniently located less than one mile from their home. The family's current monthly living expenses are listed below:

Question 62

Ignoring income taxes and assuming that cost of goods sold is a constant percentage of sales, calculate the maximum amount that would be economically optimal to spend on a security system if pilferage could be completely eliminated.
The Linden chain of ladies' fashion wear wishes to appraise its security system in an effort to reduce pilferage for the coming period. The following details are estimated for the current period:

Question 63

Ignoring income taxes and assuming that cost of goods sold is a constant percentage of sales, calculate the maximum amount that would be economically optimal to spend on a security system if pilferage could be completely eliminated.
Home Retail, Inc. wishes to appraise its security system in an effort to reduce pilferage for the coming period. The following details are estimated for the current period:

Question 64

The Cut Stop is a small but prosperous hair cutting salon. Kathy Harvey, the manager of the salon, has been asked by several clients if she will ever offer other "hair related"
services (e.g., perm, dye, etc). After careful thought, Harvey is considering expanding her offerings. However, in order to do so, she will have to hire one additional stylist at a salary of $26,000 per year. Other expenses will increase as follows: rent by 20%, supplies and utilities by 25%, and miscellaneous expenses by 10%. Her revenues from additional services are likely to be $55,000 for the next year (i.e., 2007). The Cut Stop's income statement for the most recent year is presented below.

Required:
(a) Based on your financial analysis, should Kathy Harvey go ahead with the expansion?
(b) What other factors must Harvey consider before making a final decision?

Question 65

Linden also noted that Salary Experts quoted a fixed fee of $125,000 and variable processing costs of $7.50 per employee transaction. She did not believe that the company will actually save money by outsourcing the payroll function. For one, she did not think that the company will actually save all of the above mentioned amounts. She knew that the payroll department manager could not be removed from the company because he had to oversee the payroll function and serve as a liaison with the outside company. However, all other employees in the department would likely not be required.
Required:
(a) Assume Educational Toys has 14,000 employees on its payroll. Can the company save money by outsourcing the payroll function?
(b) What are the pros and cons of outsourcing the payroll function?
Anika Linden, the Vice-President for Human Resources in Educational Toys, Inc. was concerned about a recent memo she had recently received from the CEO's office regarding the possibility of outsourcing the payroll function to Salary Experts, a growing provider of a variety of human resource services. She was shocked that the CEO's office had discussed this matter with the Board of Directors, but failed to consult her.
Linden was preparing for a meeting with the CEO. In reading the memo and its attachments, Linden observed the following comparison of costs in a report prepared by the controller's office:

Question 66

Castagna also observes that reworking a defective product consumes more labor time than making a unit from scratch. As a result, for every three units reworked, Mussell forgoes the production and sale of two units.
Required:
(a) Do you agree with Julie King that it is cheaper to scrap than rework a defective unit? Show your computations.
(b) How can the cost information generated by Castagna be useful in reducing the number of defectives?
Julie King, the production manager of Mussell Corporation is frustrated by the company's policy of not scrapping defective units but reworking them. She has pointed out several times to senior management that some units are beyond rework and should be scrapped. According to her, in most cases, it would be cheaper to scrap and build a new unit from scratch rather than trying to rework a defective unit. However, Paul Oasis, the CEO, is not convinced. She wants her controller, Mandie Castagna, to gather some information.
After researching the problem, Castagna provides the following information:

Question 67

Laurie Riley is a purchasing agent for a motorcycle manufacturer. Laurie is evaluating two potential suppliers of seats for the company's motercycles. One supplier (A) quotes a price of $165 per seat and assures 100% quality and delivery standards. The second supplier (B) quotes a price of $135 per seat but does not give any written assurances on quality or delivery. Riley is not sure which supplier should be awarded the contract.
Assume you are the management accountant for the motorcycle manufacturer. Riley asks you to prepare an estimate of the related costs of buying the seats from supplier B. She tells you that the estimate is needed because unless dollar estimates are attached to nonfinancial factors, such as lost production costs, her supervisor will not give it full attention. Riley provides you with the following information:
● Production output is 2,000 motorcycles per year based on 250 production days a year.
● Production time per day is 8 hours at a cost of $4,000 per hour to run the production line.
● Lost production time due to poor quality is 1%.
● Satisfied customers purchase, on average, three motorcycles during a lifetime.
● Satisfied customers recommend the product, on average, to 5 other people.
● Marketing estimates that using the seat from supplier B will result in 5 lost customers per year from repeat business and referrals.
● Average contribution margin per motorcycle is $5,000.
Required:
Estimate the costs of buying motorcycle seats from supplier B. (Note: This problem requires you to think creatively and make reasonable estimates; therefore, there is more than one correct answer.)

Question 68

The outside supplier has quoted a price of $90 per unit for supplying this component. The following is a conversation that took place among the manufacturing manager (Dana Rice), buyer (Emily Scanlon) and Sam Weiss.
Weiss: I think that we should continue to manufacture internally because we can save $1.90 per unit on this component.
Rice: According to your report, we would save $1.90 per unit, but I do not agree with those numbers.
Weiss: What do you mean? I have followed the same costing guidelines this company has used for years. I have even cross-checked my numbers with historical data and know for sure that the overhead rates which I have used are correct.
Rice: I am sure you have done your job thoroughly, but I think that our costing system is archaic. This component is complex and difficult to manufacture. I believe that our overhead allocation method does not accurately capture the production difficulties and the additional resources that are devoted to the manufacture of this component. For example, a significant portion of our quality problems are due to this component. We spend close to a third of our quality inspection time on just this component alone, but that is not reflected. These quality problems cause delays in getting this component to the assembly department, and that causes a delay in getting the final product to the customers. Many of our customers are expecting just-in-time deliveries, and they get upset when we're late.
Scanlon: I know that the supplier that has approached us has a strong reputation for quality. Therefore, we can rest assured that we will have negligible quality problems.
Rice: Sam, your report does not consider this additional benefit from buying outside. I would appreciate if you can rework your numbers to better reflect the true costs associated with manufacturing this component internally.
Required:
(a) Assume the role of Sam Weiss. What are the different elements of costs that are likely to be associated with the manufacture of the component? Does the current costing system capture these costs?
(b) Recommend improvements in the costing system.
(c) How can Weiss quantify "qualitative"
benefits such as quality and on-time delivery?
Thompson Metal Corporation (TMC) supplies various types of machine tools to manufacturing companies. TMC has always paid a lot of attention to the quality of its products. Recently, an outside supplier has approached TMC to supply an important and intricate component of one of its more advanced tools that TMC has been manufacturing in-house. Sam Weiss, a junior accountant at TMC, has collected the following information regarding this proposal.
The cost of manufacturing one unit of this component internally are as follows:

Question 69

Streamline Shoe Company, a manufacturer of women's shoes, recently implemented a quality improvement program aimed at streamlining the manufacturing process. Carl Silverman, an industrial engineer and a resident expert on process improvement, was assigned the task of implementing the program.
Silverman's first task was to educate all the employees involved with the production process. He sent a memo to representatives in product design and development, materials management (including purchasing), marketing, distribution, customer service and accounting, in addition to those in the production department, inviting them to attend an information session on the improvement program.
He began the meeting by thanking all those who were present (over 35 in number) and spent the first hour explaining the need for such a program. Soon after, the attendees were engaged in a discussion. Several questions were raised during the discussion. Among these, three questions stood out. What is the need for including members from design, marketing, and other functional areas when the improvement program's focus is on streamlining the manufacturing process? What is the role of the cost management expert in this program? Finally, why should the machine operators be involved, as they are not engineers? Required:
Consider the three questions that stood out in the discussion. Assume the role of Carl Silverman and prepare a response addressing the questions.

Question 70

Consider the following management activities:
● Choose the organization's long-term strategy
● Plan and organize the use of resources into efficient operations
● Implement plans and organizational change
● Measure and report results
● Define the organization's scale and scope of operations
Required: (a) Identify the sequence in which the decisions must be carried out. Why is it important to carry out these activities sequentially?
(b) How can an effective cost management system support the above activities?

Question 71

Greg Piff, a new assistant sales manager was faced with a dilemma. His supervisor, Kathleen Holbrook, instructed him to prepare an invoice for $300,000 in the name of General Builders, a regular customer. Upon refusing to comply with the request because no order was received, Holbrook explained to Piff that this was normal practice during the end of the year in order to meet or exceed the annual sales target. Holbrook also clarified that the goods will not be physically delivered to the customer and a reverse entry will be made in the accounting records during the next year.
Piff is unsure about what is to be done because the amount is significant. He recollected that Holbrook had promised to give him a favorable review if he complied with the instruction. Piff has come to seek your advice as a professional, regarding the proper way to handle the situation in order to minimize the effects of any repercussions his actions may have.
Required:
(a) Does Greg have an ethical responsibility to take a course of action?
(b) What course of action would you take? What course of action should Piff take?
(c) Why is it important that such actions are curbed?

Question 72

Holinger quoted a price of $66.60 for each engine transferred to the SBAD. John Hargreaves, the manager of SBAD, was furious to note that the ED was "trying to make money off a sister division."He argued that the price must include only the cost of materials, as all other costs will be incurred irrespective of whether or not SBAD places the order for 20,000 engines. Matt Hall, the production manager of ED, pointed out that the special equipment will be purchased only for fulfilling this internal order. Moreover, he argued that inspection must also be done just like on all other engines; therefore, the inspection costs must also be included. Labor is paid a flat monthly salary. Other manufacturing costs include both variable and fixed components (in roughly equal proportion).
Required:
(a) Given that excess capacity exists, what is the minimum price that the ED must charge to the SBAD?
(b) What are the pros and cons of internal sourcing?
Cleary Yard Equipment Corporation manufactures lawn mowers and snow blowers. It also manufactures engines that are used by the Lawn Mower Assembly Division (LMAD). The Engine Division (ED) also sells about 40% of its output to the outside market (these are multipurpose engines). Its annual capacity is 150,000 units and annual output 135,000 units. All engines sold internally to the LMAD are priced at cost plus 20% markup.
In January 2007, the Snow Blower Assembly Division (SBAD) approached the ED to 'buy' 20,000 engines. Diane Holinger, the controller of ED, computed the costs of manufacturing these engines as follows:

Question 73

In September, 2006, Paul Otellini, CEO of Intel Inc., a computer chipmaker, announced the company's plan to eliminate 10,000 jobs, approximately 10% of the company's worldwide workforce of 100,000 employees. Many of the job cuts would be in the marketing area, as company studies concluded that the company's ratio of marketing personnel to salespeople was higher than that of competitors. This move follows the layoff of 1,000 managers in July, 2006. The strategic moves were in response to Intel's lost market share to rival Advanced Micro Devices in recent years and 57% drop in net income and 13% drop in revenues from the previous fiscal year. (News.Com. September 5, 2006)
Required:
(a) Describe the quantitative aspects of Intel's decision.
(b) Describe the quantitative aspects of Intel''s decision.
(c) What step in Intel's value chain is impacted by this decision?

Question 74

In a presentation to the investment community, Sam Palmisano, CEO of IBM Corporation, stated: "We intend to continue to take share, as we have in the past two or three years, in our core businesses."
Palmisano contended that the category of business-process transformation services, such as customer support, human resources, and other administrative overhead, represents an untapped market of $500 billion dollars if businesses outsourced these functions to companies like IBM. IBM's expressed goal is to capture 10% of this new market. Palmisano also cited new business opportunities in information technology. The company's new chief financial officer, John Loughridge, stated that IBM's goal was to achieve high-single digit annual percentage gains in sales and greater than 10% yearly increases in earnings per share. (Source: Barron's: May 24, 2004)
Required:
(a) Does the strategy described by IBM's management fall into the build, hold, harvest or divest category of strategic missions? Explain your answer with specific examples related to the general characteristics of that category of strategic mission.
(b) Identify the types of risks and rewards normally encountered by a company with the strategic mission described by IBM's management.

Question 75

Briefly explain this statement: Cost Management is important to organizations because it is more than measuring and reporting product and service costs. It is a philosophy, an attitude and a set of techniques to create more value at lower costs.