Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN: 9781337115773
Author: Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher: Cengage Learning
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Textbook Question
Chapter 5, Problem 58P
Grundvig Manufacturing produces several types of bolts used in aircraft. The bolts are produced in batches and grouped into three product families. Because the product families are used in different kinds of aircraft, customers also can be grouped into three categories, corresponding to the product family that they purchase. The number of units sold to each customer class is the same. The selling prices for the three product families range from $0.50 to $0.80 per unit. Historically, the costs of order entry, processing, and handling were expensed and not traced to individual customer groups. These costs are not trivial and totaled $9,000,000 for the most recent year. Recently, the company started emphasizing a cost reduction strategy with an emphasis on creating a competitive advantage.
Upon investigation, management discovered that order-filling costs were driven by the number of customer orders processed with the following cost behavior:
Step-fixed cost component: $50,000 per step (2,000 orders define a step)*
Variable cost component: $20 per order
*Grundvig currently has sufficient steps to process 200,000 orders.
The expected customer orders for the year total 200,000. The expected usage of the order-filling activity and the average size of an order by customer category follow:
As a result of cost behavior analysis, the marketing manager recommended the imposition of a charge per customer order. The charge was implemented by adding the cost per order to the price of each order (computed by using the projected ordering costs and expected orders). This ordering cost was then reduced as the size of the order increased and was eliminated as the order size reached 2,000 units. Within a short period of communicating this new price information to customers, the average order size for all three product families increased to 2,000 units.
Required:
- 1. CONCEPTUAL CONNECTION Grundvig traditionally has expensed order-filling costs. What is the most likely reason for this practice?
- 2. Calculate the cost per order for each customer category. (Note: Round to two decimal places.)
- 3. CONCEPTUAL CONNECTION Calculate the reduction in order-filling costs produced by the change in pricing strategy (assuming that resource spending is reduced as much as possible and that the total units sold remain unchanged). Explain how exploiting customer activity information produced this cost reduction. Would any other internal activities benefit from this pricing strategy?
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Chapter 5 Solutions
Managerial Accounting: The Cornerstone of Business Decision-Making
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Ch. 5 - Prob. 11DQCh. 5 - What are value-added activities? Value-added...Ch. 5 - What are nonvalue-added activities? Nonvalue-added...Ch. 5 - Identify and define four different ways to manage...Ch. 5 - Prob. 15DQCh. 5 - A batch-level driver is consumed by a product each...Ch. 5 - Which of the following is a nonunit-level driver?...Ch. 5 - Prob. 3MCQCh. 5 - Use the following information for Multiple-Choice...Ch. 5 - The first stage of ABC entails the assignment of...Ch. 5 - The second stage of ABC entails the assignment of...Ch. 5 - Interview questions are asked to determine a. what...Ch. 5 - Prob. 8MCQCh. 5 - Assume that the moving activity has an expected...Ch. 5 - Which of the following is a true statement about...Ch. 5 - Prob. 11MCQCh. 5 - This year, Lambert Company will ship 1,500,000...Ch. 5 - Prob. 13MCQCh. 5 - A forklift and its driver used for moving...Ch. 5 - Which of the following are nonvalue-added...Ch. 5 - Suppose that a company is spending 60,000 per year...Ch. 5 - Prob. 17MCQCh. 5 - Thom Company produces 60 units in 10 hours. The...Ch. 5 - Thom Company produces 60 units in 10 hours. The...Ch. 5 - Striving to produce the same activity output with...Ch. 5 - Use the following information for Brief Exercises...Ch. 5 - Use the following information for Brief Exercises...Ch. 5 - Calculating ABC Unit Costs Perkins National Bank...Ch. 5 - Assigning Costs to Activities McCourt Company...Ch. 5 - Activity-Based Customer Costing Sleepeze Company...Ch. 5 - Activity-Based Supplier Costing Clearsound uses...Ch. 5 - Prob. 27BEACh. 5 - Velocity and Cycle Time Kolby Company takes 36,000...Ch. 5 - Use the following information for Brief Exercises...Ch. 5 - Use the following information for Brief Exercises...Ch. 5 - Prob. 31BEBCh. 5 - Assigning Costs to Activities Craig Company...Ch. 5 - Activity-Based Customer Costing Limpio Company...Ch. 5 - Activity-Based Supplier Costing Blackburn Inc....Ch. 5 - Nonvalue-Added Costs Evans Inc. has the following...Ch. 5 - Velocity and Cycle Time Tara Company takes 8,000...Ch. 5 - Consumption Ratios; Activity Rates Saludable...Ch. 5 - Activity Rates Patten Company uses activity-based...Ch. 5 - Comparing ABC and Plantwide Overhead Cost...Ch. 5 - Activity-Based Product Costing Suppose that a...Ch. 5 - Assigning Costs to Activities, Resource Drivers...Ch. 5 - Activity-Based Customer-Driven Costs Suppose that...Ch. 5 - Activity-Based Supplier Costing Bowman Company...Ch. 5 - Use the following information for Exercises 5-44...Ch. 5 - Use the following information for Exercises 5-44...Ch. 5 - Use the following information for Exercises 5-44...Ch. 5 - Cycle Time and Velocity In the first quarter of...Ch. 5 - Product-Costing Accuracy, Consumption Ratios Plata...Ch. 5 - Product-Costing Accuracy, Consumption Ratios,...Ch. 5 - Formation of an Activity Dictionary A hospital is...Ch. 5 - Activity Rates and Activity-Based Product Costing...Ch. 5 - Value- and Nonvalue-Added Costs Waterfun...Ch. 5 - Functional-Based versus Activity-Based Costing For...Ch. 5 - Plantwide versus Departmental Rates,...Ch. 5 - Production-Based Costing versus Activity-Based...Ch. 5 - Prob. 56PCh. 5 - Customers as a Cost Object Morrisom National Bank...Ch. 5 - Grundvig Manufacturing produces several types of...Ch. 5 - Activity-Based Supplier Costing Levy Inc....Ch. 5 - Danna Martin, president of Mays Electronics, was...Ch. 5 - John Thomas, vice president of Mallett Company (a...Ch. 5 - Cycle Time, Velocity, Product Costing Goldman...Ch. 5 - Prob. 63CCh. 5 - Consider the following conversation between...
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