5 Managerial Accounting Questions due Saturday, August 5th at 12:00 PM CDT. 

EXERCISE 8: TARGET COSTING AND PRICING 

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 3.45% 
External failure costs                 
Warranty claims $22,600   $4,400   $2,500   $17,100   
                  Customer complaint processing 31,600   8,100   6,400   22,300   
                  Returned goods 29,900   5,600   3,100   19,800   
                                Total external failure costs $84,100 6.01% $18,100 1.13% 12,000 0.80% 59,200 3.48% 
Total costs of nonconformance $159,000 11.40% $42,700 2.67% $29,900 1.99% $117,900 6.93% 
Total costs of quality $186,600 13.33% $133,900 8.37% $162,200 10.79% $170,200 10.01% 
  Ratios of Nonfinancial Measures:              
  Number of sales to number of warranty claims 168 to 1   372 to 1   996 to 1   225 to 1
  Number of products produced to number of products reworked 1,420 to 1   3,257 to 1   6,430 to 1   2,140 to 1
  Change in throughout time (positive amoun means time reduction) (-4.615%)   2.163%   5.600%   (-1.241%)
  Total number of deliveries to number of late deliveries 86 to 1   168 to 1   290 to 1   128 to 1

REQUIRED: 

  1.  Rank the divisions in order of their apparent product quality.
  2. What three measures were most important in your rankings in 1?  Why?
  3. Which division is most successful in its bid to improve quality?  What measures illustrate its high-quality rating?
  4. Consider the two divisions producing the lowest-quality products.  What actions would recommend to the management of each division?  Where should their quality dollars be spent?
 
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