Target Costing and Pricing

Exercise 8: Lovebug Company has determined that its new automotive hood screen would gain widespread customer acceptance if the company could price it at or under \$30.  Anticipated labor hours and costs for each unit of the new product follow.

 Direct Materials Cost \$5 Direct labor cost Manufacturing labor: Hours 0.2 Hourly labor rate \$10 Assembly labor: Hours 0.5 Hourly labor rate \$15 Machine hours 1 The company currently uses the following three activity-based cost rates: Machine handling \$0.30 per dollar of direct materials Production \$5.00 per machine hour Product delivery \$0.50 per unit

The company’s minimum desired profit is 40 percent over total production and delivery cost.  Compute the target cost for the new hood screen, and determine if the company should market it (Round to two decimal places).

Problem 5

Developing Transfer Prices

Sand Company has two divisions, Glass Division and Instrument Division.  For several years, Glass Division has manufactured a special glass container, which it sells to Instrument Division at the prevailing market price of \$20.  Glass Division produces the glass containers only for Instrument Division and does not sell the product to outside customers.  Annual production and sales volume is 20,000 containers.  A unit cost analysis for Glass Division follows.

 Cost Categories Costs per Container Direct Materials \$3.50 Direct labor, 1/4 hour 2.3 Variable overhead 7.5 Avoidable fixed costs: \$30,000/20,000 units 1.5 Corporate overhead: \$3.60 per direct labor hour 4.5 Variable shipping costs 1.2 Unit Cost \$20.50

Corporate overhead represents the allocated joint fixed costs of production- building depreciation, property taxes, insurance, and executives’ salaries.  A profit markup of 20 percent is used to determine transfer prices.

REQUIRED:

1.  What would the appropriate transfer price for Glass Division to use in billing its transactions with Instrument Division?

2. If Glass Division decided to sell some containers to outside customers, would your answer to requirement 1 change?  Defend your response.

3. What factors concerning transfer price should management consider when transferring products between divisions?

Exercise 4: Measures of Quality in a Service Business

Rehab Health Care, LLC, incurred the service-related activity costs for the month that follow.

 Total sales \$40,000 Customer complaint processing 1,000 Employee training 400 Reinspection and retesting 500 Design review of service procedures 300 Technical support 200 Investigation of service defects 800 Sample testing of vendors 100 Inspection of supplies 150 Quality audits 250 Quality-related downtime 300

Prepare an analysis of the costs of quality for Rehab Health Care.  Categorize the costs as (a) costs of conformance, with subsets of prevention costs and appraisal costs, or (b) costs or nonconformance, with subsets of internal failure costs and external failure costs.  Compute the percentage of sales represented by prevention costs, appraisal costs, total costs of conformance, internal failure costs, external failure costs, total costs of nonconformance, and total costs of quality.  Also compute the ratio of costs of conformance to total costs of quality of costs of nonconformance to total costs of quality.

Exercise 9: Measures of Production Performance

Analyze the following nonfinancial measures of quality for Sweet Express, Inc., a supplier of novelty candy boxes, for a recent four-week period.  Focus specifically on measures of production performance.

 Measures of Quality Week 1 Week 2 Week 3 Week 4 Percentage of defective products per million produced 0.9% 0.7% 0.5% 0.4% Equipment utilitization rate 89% 90% 89% 90% Machine downtime (hours) 11 9 12 11 Machine maintenance time (hours) 9 8 8 9 Machine setup time (hours) 3 4 5 3

Problem 4: Interpreting Measures of Quality

Circuit Corporation supplies integrated circuitry to major appliance manufacturers in all parts of the world.  Producing a high-quality product in each of the company’s four divisions is the mission of management.  Each division is required to record and report its efforts to achieve quality in all of its primary product lines.  The following information for the most recent three-month period was submitted to the chief financial officer:

Macon Division

Dothan Division

Valdosta Division

Columbia Division

Amount

% of Rev

Amount

% of Rev

Amount

% of Rev

Amount

% of Rev

Costs of Conformance

Prevention Costs:

Quality training of employees

\$4,400

\$15,600

\$23,600

\$8,900

Process engineering

3,100

19,700

45,900

9,400

Preventive maintenance

5,800

14,400

13,800

11,100

Total prevention costs

\$13,300

0.95%

\$49,700

3.11%

\$83,300

5.55%

\$29,400

1.73%

Appraisal costs:

End-of-process sampling and testing

\$3,500

\$19,500

\$21,400

\$6,900

Quality audits of products

6,100

11,900

17,600

8,700

Vendor Audits

4,100

10,100

9,800

7,300

Total appraisal costs

13,700

0.98%

\$41,500

2.59%

\$48,800

3.25%

22,900

1.35%

Total costs of conformance

27,000

1.93%

\$91,200

5.70%

\$132,100

8.80%

\$52,300

3.08%

Costs of Nonconformance

Internal failure costs:

Quality-related downtime

\$26,800

\$8,300

\$6,500

\$22,600

Scrap and rework

17,500

9,100

7,800

16,200

Scrap disposal losses

31,200

7,200

3,600

19,900

Total internal failure costs

75,500

5.39%

\$24,600

1.54%

\$17,900

1.19%

\$58,700