Mr.

Mohamed Aljamri Tel: 39636632

CHAPTER 13: ABC costing system

Problem 1:
Maxi-Drive manufactures a wide variety of parts for recreational boating, including a gear and
driveshaft part for high-powered outboard boat engines. Original equipment manufacturers such
as Mercury and Honda purchase the components for use in large, powerful outboards. The part
sells for $610, and sales volume averages 25,000 units per year. Recently, Maxi-Drive’s major
competitor reduced the price of its equivalent unit to $550. The market is very competitive, and
Maxi-Drive realizes it must meet the new price or lose significant market share. The controller
has assembled these cost and usage data for the most recent year for Maxi-Drive’s production of
25,000 units:

Required:
1. Calculate the target cost for maintaining current market share and profitability.
2. Can the target cost be achieved? How?

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Problem 2:
Rick’s is a popular restaurant for fine dining. The owner and chef, Rick Goetz, is pleased with
his success and is now considering expanding his existing restaurant or perhaps opening a second
restaurant. Before making his decision, Rick wants to find out more about his competitive
position. There are three other restaurants that compete directly with him on food quality and
price. Rick knows that his profitability depends on his ability to provide a satisfying meal at the
market price. His first step is to gather some information about his customers, using an
independent market research firm, which informed him that his customers were looking for taste,
comfort (the ambiance, service, and overall presentation of the food), and enjoyment (the
distinctiveness of the dining experience, a degree of excitement). He was surprised to find that
comfort and enjoyment ranked highest.

Next, he worked with his key wait staff and chefs to try to identify the three main components,
and related cost, of the service Rick’s provided:

Having the customer criteria and components, Rick now again worked with his staff to assess
how each component contributed to the desired customer criteria.

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Required:
1. Using the information Rick has developed, determine the importance index for each
component (menu and food preparation, wait staff, and food ingredients).
2. Compare your findings in Part 1 to the cost of the components. What conclusions can you
draw from this comparison?

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Problem 3:
Williams Inc. produces a single product, a part used in the manufacture of automobile
transmissions. Known for its quality and performance, the part is sold to luxury auto
manufacturers around the world. Because this is a quality product, Williams has some flexibility
in pricing the part. The firm calculates the price using a variety of pricing methods and then
chooses the final price based on that information and other strategic information. A summary of
the key cost information follows. Williams expects to manufacture and sell 48,500 parts in the
coming year. While the demand for Williams’ part has been growing in the past two years,
management is not only aware of the cyclical nature of the automobile industry but also
concerned about market share and profits during the industry’s current downturn.

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Problem 4:
Kate Stephens, the COO of BioDerm, has asked her cost management team for a product-line
profitability analysis for hier firm’s two products, Xderm and Yderm. The two skin care products
require a large amount of research and development and advertising. After receiving the
following statement from BioDerm’s accountants, Kate concludes that Xderm is the more
profitable product and that perhaps cost-cutting measures should be applied to Yderm:

Required
1. Explain why Tim may be wrong in his assessment of the relative performances of the two
products.
2. Suppose that 80 percent of the R&D and selling expenses are traceable to Xderm. Prepare
life-cycle income statements for each product. What does this tell you about the importance
of accurate life-cycle costing?
3. Consider again your answers in requirements 1 and 2 with the following additional
information. R&D and selling expenses are substantially higher for Xderm because it is a
new product. Tim has strongly supported development of the new product, including the high
selling and R&D expenses. He has assured senior managers that the Xderm investment will
pay off in improved profits for the firm. What are the ethical issues, if any, facing Tim as he
reports to top management on the profitability of the firm’s two products?

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Problem 5:
Marchand's Restaurant had developed an excellent reputation in recent years for its price, menu,
and atmosphere. The restaurant is now completing a strategic analysis to determine whether it
should make adjustments in its menu, pricing, or wait service, to better meet customer needs and
to become more competitive. Marchand's has chosen to use Quality Function Deployment (QFD)
to analyze customer preferences and its cost structure. The analysis focuses on costs that can be
managed in the short term, and therefore excludes facility related costs.

The data that Marchand's has collected so far includes information about customer preferences
(Marchand's surveyed customers regarding their preferences for taste, comfort and atmosphere)
and the unit cost of the three key elements of its service: food preparation, wait staff, and food
ingredients.
First: Customer Criteria and Ranking
Importance Relative Importance
Taste 100 40.00%
Comfort 50 20.00%
Atmosphere 100 40.00%
Total 250 100.00%
Second: Product Components and Cost
Cost Percent of Total
Food Preparation $ 5 21.74%
Wait Staff 15 65.22%
Food Ingredients 3 13.04%
Total $ 23 100.00%

Next, Marchand completed an analysis, using the expertise of its managers, wait staff and
kitchen staff, to determine the contribution of each of the three elements of its service to
satisfying the three components of customer satisfaction.

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Third: Determine How Components Contribute to Customer Satisfaction

Customer Criteria

Components Taste Comfort Atmosphere

Food Preparation 20% 10% 10%

Wait Staff 20% 80% 70%

Food Ingredients 60% 10% 20%

100% 100% 100%

Required:
Determine which of the three cost elements (food preparation, wait staff, and food ingredients)
should be given increased or decreased emphasis based on a QFD analysis. Explain your answer
with appropriate calculations.

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Problem 6:
Excel Manufacturing is planning to make and sell 5,000 units of its only product, Excel-A. Excel
is considering a variety of methods to determine the price of the order.
Some key information about Excel follows:

Total Costs
Variable Manufacturing $ 650,000
Variable Selling and Administrative 125,000
Plant-level Fixed Manufacturing Overhead 700,000
Fixed Selling and Administrative 200,000
Batch-level Fixed Manufacturing Overhead 50,000
Total Investment in Product Line 2,000,000

Required:
1. Determine the price using the markup of 40% of full manufacturing costs.
2. Determine the price using a 20% markup on life cycle costs.
3. Determine the price assuming a desired 50% gross margin percentage.
4. Determine the price assuming a desired 30% return on life cycle costs.
5. Determine the price assuming a desired 20% return on investment.

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Problem 7:
Gail Johnston is the CFO of Lancet Technologies, a manufacturer of parts and supplies for the
cable TV industry. Gail has developed an analysis of the profitability of the firm's two main
product lines, cable hardware, and cable supplies. Based on the analysis, she concludes that cable
hardware is the most profitable of the firm's product lines.

Hardware Supplies Total

Sales $ 4,000,000 $ 3,000,000 $ 7,000,000
Cost of goods sold (2,300,000) (1,900,000) (4,200,000)
Gross profit $ 1,700,000 $ 1,100,000 2,800,000
Research and development (1,200,000)
Selling expenses (600,000)
Profit before taxes $ 1,000,000

Required:

1. Explain why Gail may be wrong in her assessment of the relative performances of the two
product lines.
2. Suppose that 80 percent of the R & D and selling expenses are traceable to Hardware line.
Prepare life-cycle income statements for each product and calculate the return on sales. What
does this tell you about the importance of accurate life-cycle costing?

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Problem 8:
Cling Company produces and sells three products (X, Y, and Z). The following data relate to the
three products. Labor is a fixed cost.

X Y Z
Demand in units 190 200 210
Selling price per unit $ 160 $ 190 $ 180
Raw materials costs per unit $ 80 $ 100 $ 110
Labor time in minutes per unit 20 28 12

Required:

1. Which is the most profitable product if there is no labor constraint?

2. Which is the most profitable product if there is a labor constraint?

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Problem 9:
Bell Company produces and sells three products (A, B, C). The following data relate to the three
products. Management considers labor to be a fixed cost.

A B C
Demand in units 120 110 100
Selling price per unit $ 100 $ 120 $ 105
Raw materials cost/unit $ 50 $ 60 $ 60
Labor time in minutes/unit 12 17 7

Required:

1. Calculate the contribution per labor minute for each product.

2. Determine the best product mix. Assume there are five employees, and given time for breaks,
training, and regular meetings, there are a total of 2,200 minutes available per day.

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Problem 10:
Activities and Market Characteristics Sales Life-Cycle Stage

Activities and Market Characteristics Life Cycle Stage

Decline in sales
Advertising
Boost in production
Stabilized profits
Competitor’s entrance into market
Market Research
Market Saturation
Start Production
Product Testing
Termination of Product
Large Increase in sales

Required:
Insert the appropriate life-cycle stage in the space provided after each activity.
Activities and Market Characteristics Life Cycle Stage
Decline in sales Decline
Advertising Introduction
Boost in production Growth
Stabilized profits Maturity
Competitor’s entrance into market Growth
Market Research Introduction
Market Saturation Maturity
Start Production Introduction
Product Testing Introduction
Termination of Product Decline
Large Increase in sales Growth

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