Managerial Accounting: Creating Value in a Dynamic Business Environment
12th Edition
ISBN: 9781260417074
Author: HILTON, Ronald
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 15, Problem 44P
Alexis Kunselman, president of Pharsalia Electronics (PE), is concerned about the prospects of one of its major products. The president has been reviewing a marketing report with Jeff Keller, marketing product manager, for their 10-disc car compact disc (CD) changer. The report indicates another price reduction is needed to meet anticipated competitors’ reductions in sales prices. The current selling price for their 10-disc car CD changer is $350 per unit. It is expected that within three months PE’s two major competitors will be selling their 10-disc car CD changers for $300 per unit. This concerns Kunselman because their current cost of producing the CD changer is $315, which yields a $35 profit on each unit sold.
The situation is especially disturbing because PE had implemented an activity-based costing (ABC) system about two years ago. The ABC system helped them better identify costs, cost pools, cost drivers, and cost reduction opportunities. Changes made when adopting ABC reduced costs on this product by approximately 15 percent during the last two years. Now it appears that costs will need to be reduced considerably more to remain competitive and to earn a profit on the 10-disc car CD changers. Total costs to produce, sell, and service the CD changer units are as follows:
Kunselman has decided to hire Donald Collins, a consultant, to help decide how to proceed. After two weeks of review, discussion, and value engineering analysis, Collins suggested that PE adopt a just in-time (JIT) cell manufacturing process to help reduce costs. He also suggested that using target costing would help in meeting the new target price.
By changing to a JIT cell manufacturing system, PE expects that manufacturing direct labor will increase by $15 per finished unit. However, setup, material handling, inspection, and finished goods warehousing will all be eliminated. Machining costs will be reduced from $35 to $30 per unit, and warranty costs are expected to be reduced by 40 percent.
Required:
- 1. Define target costing.
- 2. Define value engineering.
- 3. Determine Pharsalia Electronics’ unit target cost at the $300 competitive sales price while maintaining the same percentage of profit on sales as is earned on the current $350 sales price.
- 4. If the just-in-time cell manufacturing process is implemented with the changes in costs noted, will Pharsalia Electronics meet the unit target cost you determined in requirement (3)? Prepare a schedule detailing cost reductions and the unit cost under the proposed JIT cell manufacturing process.
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Chapter 15 Solutions
Managerial Accounting: Creating Value in a Dynamic Business Environment
Ch. 15 - Prob. 1RQCh. 15 - Prob. 2RQCh. 15 - List and briefly describe four major influences on...Ch. 15 - Prob. 4RQCh. 15 - Prob. 5RQCh. 15 - Prob. 6RQCh. 15 - Define the following terms: total revenue,...Ch. 15 - Prob. 8RQCh. 15 - Prob. 9RQCh. 15 - Prob. 10RQ
Ch. 15 - Prob. 11RQCh. 15 - List the four common cost bases used in cost-plus...Ch. 15 - List four reasons often cited for the widespread...Ch. 15 - What is the primary disadvantage of basing the...Ch. 15 - Prob. 15RQCh. 15 - Prob. 16RQCh. 15 - Prob. 17RQCh. 15 - Explain the phrase price-led costing.Ch. 15 - Prob. 19RQCh. 15 - Prob. 20RQCh. 15 - Could tear-down methods be used effectively for...Ch. 15 - Briefly describe the time-and-material pricing...Ch. 15 - Explain the importance of the excess-capacity...Ch. 15 - Prob. 24RQCh. 15 - Describe the following approaches to pricing new...Ch. 15 - Prob. 26RQCh. 15 - Briefly explain the potential negative...Ch. 15 - Prob. 28ECh. 15 - Prob. 29ECh. 15 - Prob. 30ECh. 15 - The marginal cost, marginal revenue, and demand...Ch. 15 - Prob. 32ECh. 15 - Refer to the cost and production data for the Wave...Ch. 15 - Prob. 35ECh. 15 - The following data pertain to Royal Lighting...Ch. 15 - Prob. 37ECh. 15 - Badger Valve and Fitting Company, located in...Ch. 15 - North American Pharmaceuticals, Inc. specializes...Ch. 15 - MPE, Inc. will soon enter a very competitive...Ch. 15 - Prob. 41PCh. 15 - Prob. 42PCh. 15 - Prob. 43PCh. 15 - Alexis Kunselman, president of Pharsalia...Ch. 15 - Southern Tier Heating, Inc. installs heating...Ch. 15 - Omaha Synthetic Fibers Inc. specializes in the...Ch. 15 - Prob. 47PCh. 15 - Prob. 48CCh. 15 - Zylar Industries is a manufacturer of standard and...
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