Accounting for Decision Making and Control 8th Edition by Jerold Zimmerman

Exercise 18

Cibo Leathers
Cibo Leathers manufactures a line of designer purses and handbags, some selling for as much as $1,000 per bag. One particular style requires a hand-stitched shoulder strap of cow leather that has been predyed. Cibo purchases large sheets of predyed leather, cuts them into the desired length and width, and then braids the leather strips and sews them to produce the unique shoulder strap. Because of blemishes in the leather, there can be considerable waste. Cibo can purchase various qualities of leather. Very high-quality leather has few blemishes, so only 8 square feet and 5 minutes of cutting labor time are required to produce one shoulder strap that has 6 square feet of leather for this leather quality. However, if very low-quality leather is purchased, 12 square feet are required to yield one shoulder strap with the required 6 square feet. Moreover, 15 minutes of labor is necessary to cut the very low-quality leather to produce one strap. Prior to the beginning of Cibo's current fiscal year, the data in the following table were assembled and present the various leather qualities and labor times necessary to produce one shoulder strap.
*This strap requires 6 square feet of unblemished leather.
Skilled leather craftsmen who cut the leather into strips prior to braiding and stitching are expected to cost $30 per hour (salary, benefits, and payroll taxes) in the current fiscal year. Cibo's goal is to choose the leather quality that maximizes profits. The firm uses a standard cost system.
Required:
a. Calculate the current fiscal year's standard quantity and standard price for the leather used in the shoulder strap.
b. Calculate the current fiscal year's standard labor minutes and standard wage rate per minute.
c. Seven months into the current fiscal year, a large glut of cattle comes onto the market, drastically lowering the cost of all grades of leather. The following table details the new prices for the various leather qualities:
Suppose these prices are expected to persist not only for the remaining five months of the current fiscal year, but also for the next fiscal year. Calculate next fiscal year's standard quantity and standard price for leather used in shoulder straps, and the standard minutes to cut the leather.
d. Do you expect Cibo to revise the standard quantity and standard price of the shoulder strap leather in the current fiscal year? Explain why or why not.
e. Suppose that Cibo decides that the most efficient (profit-maximizing) leather choice is to use shoulder strap leather of very low quality, whereby 12 square feet of leather are required for each strap which has 6 square feet of leather in it. (The expected cost of this quality of leather is $0.4583 per square foot.) How does the standard cost system account for the 6 square feet of leather scrapped for every shoulder strap?