Concept explainers
Target Costing and Purchasing Decisions
Mira Mesa Appliances makes and sells kitchen equipment for offices and hotel rooms. Mira Mesa management believes that a new model of refrigerator made out of a synthetic material would sell well at a price of $260. Labor costs are estimated at $32 per unit and overhead costs would be $24 per unit. The major uncertainty is the price of the synthetic material. Mira Mesa is in negotiations with several suppliers for the material. Because of the risk associated with the new product, Mira Mesa will only proceed if the estimated return is at least 30 percent of the selling price.
Required
What is the most Mira Mesa can pay for the synthetic material per unit (refrigerator) and meet its profitability goal?
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Chapter 4 Solutions
Fundamentals Of Cost Accounting (6th Edition)
- Hudson Corporation is considering three options for managing its data warehouse: continuing with its own staff, hiring an outside vendor to do the managing, or using a combination of its own staff and an outside vendor. The cost of the operation depends on future demand. The annual cost of each option (in thousands of dollars) depends on demand as follows: If the demand probabilities are 0.2, 0.5, and 0.3, which decision alternative will minimize the expected cost of the data warehouse? What is the expected annual cost associated with that recommendation? Construct a risk profile for the optimal decision in part (a). What is the probability of the cost exceeding $700,000?arrow_forwardA number of costs are listed below that may be relevant in a decision faced by the management of Bulacan Company. Bulacan normally runs at capacity and the old Model CY1000 machine is the company’s constraint. Management is considering purchasing a new machine, Model CZ4000 and the old one, CY1000 will be sold. The new machine is more efficient and can produce 20% more units than the old one. Demand for Bulacan’s product is greater than what they can supply. If the new machine is purchased, there should be a reduction in maintenance costs however the new machine is very costly and the company will need to borrow money in order to make the purchase. The increase in volume will be large enough to require increases in fixed selling expense, but general administrative expenses will remain unchanged. Required: For each cost listed determine whether the cost is relevant or irrelevant to the decision to replace the CY1000. a. Sales Revenue b. Direct materials c. Direct labor d. Variable…arrow_forwardRequired information [The following information applies to the questions displayed below.] Praveen Company manufactures and markets a number of rope products. Management is considering the future of Product XT, a special rope for hang gliding that has not been as profitable as planned. Because Product XT is manufactured and marketed independently of the other products, its total costs can be precisely measured. Next year's plans call for a $310 selling price per unit. Its fixed costs for the year are expected to be $421,600. Variable costs for the year are expected to be $186 per unit. 2. Prepare a contribution margin income statement for Product XT at the break-even point. PRAVEEN COMPANY Contribution Margin Income Statement (at Break-Even) - Product XT Units $ per unit Total Less: Less: Sales Variable cost Contribution margin Fixed costs Incomearrow_forward
- Tell what life-cycle cost management is and how it can be usedto maximize profits over a product's life cycle.Nico Parts, Inc., produces electronic products with short life cycles (of lessthan two years). Development has to be rapid, and the profitability of theproducts is tied strongly to the ability to find designs that will keep production and logistics costs low. Recently, management has also decided that postpurchase costs are important in design decisions. Last month, a proposal for a new product was presented to management. The total market was projected at 200,000 units (for the two-year period). The proposed selling price was $130 per unit. At this price, market share was expected to be 25 percent. The manufacturing and logistics costs were estimated to be $120 per unit. Upon reviewing the projected figures, Brian Metcalf, president of Nico, called in his chief design engineer, Mark Williams, and his marketing manager, CathyMcCourt. The following conversation was recorded:…arrow_forwardTell what life-cycle cost management is and how it can be usedto maximize profits over a product's life cycle.Nico Parts, Inc., produces electronic products with short life cycles (of lessthan two years). Development has to be rapid, and the profitability of theproducts is tied strongly to the ability to find designs that will keep production and logistics costs low. Recently, management has also decided that postpurchase costs are important in design decisions. Last month, a proposal for a new product was presented to management. The total market was projected at 200,000 units (for the two-year period). The proposed selling price was $130 per unit. At this price, market share was expected to be 25 percent. The manufacturing and logistics costs were estimated to be $120 per unit. Upon reviewing the projected figures, Brian Metcalf, president of Nico, called in his chief design engineer, Mark Williams, and his marketing manager, CathyMcCourt. The following conversation was recorded:…arrow_forwardProduct decisions under bottlenecked operations Youngstown Glass Company manufactures three types of safety plate glass: large, medium, and small. All three products have high demand. Thus, Youngstown Glass is able to sell all the safety glass it can make. The production process includes an autoclave operation, which is a pressurized heat treatment. The autoclave is a production bottleneck. Total fixed costs are $85,000 for the company as a whole. In addition, the following information is available about the three products: a. Determine the contribution margin by glass type and the total company income from operations for the budgeted units of production.b. Prepare an analysis showing which product is tile most profitable per bottleneck hour.arrow_forward
- Product Decisions Under Bottlenecked Operations Youngstown Glass Company manufactures three types of safety plate glass: large, medium, and small. All three products have high demand. Thus, Youngstown Glass is able to sell all the safety glass it can make. The production process includes an autoclave operation, which is a pressurized heat treatment. The autoclave is a production bottleneck. Total fixed costs are $85,000 for the company as a whole. In addition, the following information is available about the three products: Large Medium Small Unit selling price $184 $160 $100 Unit variable cost 130 120 76 Unit contribution margin $ 54 $ 40 $ 24 Autoclave hours per unit 3 2 1 Total process hours per unit 5 4 2 Budgeted units of production 3,000 3,000 3,000 a. Determine the contribution margin by glass type and the total company income from operations for the budgeted units of production. Round the "Unit contribution margin per…arrow_forwardBigdeal Corporation manufactures paper and paper products and istrying to decide whether to purchase Smalltek Company. Smalltek has developed a process for manufacturing boxes that can replace containers that use fluorocarbons for expelling a liquid product. The price may be as high as $45 million. Bigdeal prefers to buy Smalltek and integrate its products while leaving the Smalltek management in charge of day-to-dayoperations. A major consideration is the efficiency and effectiveness of Smalltek’s operations. Bigdeal wants to obtain a report on the operational efficiency and effectiveness of the Smalltek sales, production, and research and development departments.Required:Who can Bigdeal engage to produce the report resulting from this operational audit? Several possibilities exist. Are there any particular advantages or disadvantages in choosing from among them?arrow_forwardThe jarvis corporation produces bucket loader assemblies for the tractor industry. The product has a long term life expectancy. Jarvis has a traditional manufacturing and inventory system. Jarvis is considering the installation of a just-in-time inventory system to improve its cost structure. In doing a full study using its manufacturing engineering team as well as consulting with industry JIT experts and the main vendors and suppliers of the components Jarvis uses to manufacture the bucket loader assemblies, the following incremental cost-benefit relevant information is available for analysis: The Jarvis cost of investment capital hurdle rate is 15%. One time cost to rearrange the shop floor to create the manufacturing cell workstations is $275,000. One time cost to retrain the existing workforce for the JIT required skills is $60,000. Anticipated defect reduction is 40%. Currently there is a cost of quality defect assessment listed as $150,000 per year. The setup time for…arrow_forward
- Product Decisions Under Bottlenecked Operations Youngstown Glass Company manufactures three types of safety plate glass: large, medium, and small. All three products have high demand. Thus, Youngstown Glass is able to sell all the safety glass that it can make. The production process includes an autoclave operation, which is a pressurized heat treatment. The autoclave is a production bottleneck. Total fixed costs are $234,000 for the company as a whole. In addition, the following information is available about the three products: Large Medium Small Unit selling price $122 $446 $382 Unit variable cost 96 365 336 Unit contribution margin $ 26 $ 81 $ 46 Autoclave hours per unit 2 6 4 Total process hours per unit 4 12 12 Budgeted units of production 3,400 3,400 3,400 a. Determine the contribution margin by glass type and the total company income from operations for the budgeted units of production. Large Medium…arrow_forwardJIT production, relevant benets, relevant costs, ethics. Galveston Pump Corporation is considering implementing a JIT production system. The new system would reduce current average inventory levels of $2,000,000 by 75%, but it would require a much greater dependency on the company’s core suppliers for on-time deliveries and high-quality inputs. The company’s operations manager, Frank Griswold, is opposed to the idea of a new JIT system because he is concerned that the new system (a) will be too costly to manage; (b) will result in too many stockouts; and (c) will lead to the layoff of his employees, several of whom are currently managing inventory. He believes that these layoffs will affect the morale of his entire production department. The management accountant, Bonnie Barrett, is in favor of the new system because of its likely cost savings. Frank wants Bonnie to rework the numbers because he is concerned that top management will give more weight to nancial factors and not give due…arrow_forwardA new product is being designed by an engineering team at Golem Security. Several managers and employees from the cost accounting department and the marketing department are also on the team to evaluate the product and determine the cost using a target costing methodology. An analysis of similar products on the market suggests a price of $132.00 per unit. The company requires a profit of 0.20 of selling price. How much is the target cost per unit? Round to two decimal places.arrow_forward
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