85. Warrenton Industries manufactures hydraulic components for large automated machine
tools. Myles English, the Vice President for Marketing, has concluded from his market analysis
that sales are dwindling for one of the firm’s products main products, a hydraulic valve, because
of aggressive pricing by competitors. Warrenton’s product sells for $525 whereas the
competition’s comparable part is selling in the $425 range. Mr. English has determined that a
price drop to $400 is necessary to regain market share and annual sales of 1,000 units.
Cost data based on sales of 1,000 valves:
Budgeted Quantity Actual Quantity Actual Cost
Direct Materials (sheet metal) 10,000 sq. ft. 11,000 sq. ft.
$55,800
Direct Labor 4,600 hrs. 5,200 hrs. 155,000
Machine Setups 2,500 hrs. 3,000 hrs. 95,000
Mechanical Assembly 3,000 hrs. 4,000 hrs. 140,000
Required:
1. Calculate the current cost and profit per unit.
2. How much of the current cost per unit is attributable to non-value added activities?
3. Calculate the new target cost per unit for a sales price of $400 if the profit per unit is
maintained.
4. What strategy do you suggest for Warrenton to attain the target cost calculated in part (3)?
86. 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?
87. Jamestown Furniture Co. is a small, but fast-growing manufacturer of living room
furniture. Its two principal products are end tables and sofas. There are five processes in the
manufacturing at Jamestown: Cutting the lumber, cutting the fabric, sanding, staining, and
assembly. Jamestown has one employee working in fabric cutting and one employee working in
staining. These are relatively skilled workers, and could be replaced only with some difficulty. The
cutting and sanding operations are performed by two workers each, and while there is some skill
to these operations, it is less critical than for staining and for fabric cutting. Assembly is the least
skill-based process, and is currently done by one full-time employee and a group of part timers
who provide a total of 175 minutes of working time per week. The other employees work a 40
hour week, with 5 hours off for breaks, training, and personal time. Assume a four week month,
and that by prior agreement, any of the employees can be switched from one task to another. The
current demand for Jamestown’s products and sales prices are provided below. Jamestown
expects demand to increase significantly in the coming months (this depends on whether it is
able to successfully obtain the order it is negotiating to get from a motel chain). The materials
cost for the table is $150 and $275 for the sofa.
End Tables Sofas
Price $500 $800
Current demand (units per month) 250 150
The time required for each activity and the total time available are shown below.
Required time for
Table Required
time for
Sofa
Required
Total Time
Hours
Available
Slack
Time
Cut 150 45 195 280 85
Sand 100 30 130 280 150
Assemble 125 225 350 700 350
Stain 250 120 370 280 -90
Cut Fabric 0 90 90 140 50
Required:
What is the most profitable production plan for Jamestown? Explain your answer with supporting
calculations.
88. PureSwing Golf, Inc. manufactures swing analyzer systems for golf instructors. Two of its
systems, Pure1000 and the Pure5000 have these characteristics:
Design Specifications Pure1000 Pure5000 Cost Data
Video Cameras 1 3 $115/ea.
Video Monitors 1 2 $100/ea.
Motion sensors 6 8 $15/ea.
Trajectory Readers 3 6 $10/ea.
Onscreen Writing Pads 1 2 $20/ea.
Wiring 100 ft. 300 ft. $.15/ft.
Installation 12 hrs. 16 hrs. $25/hr.
The Pure1000 sells for $1,000 installed and the Pure5000 sells for $1,750 installed.
Required:
1. What are the current profit margins on both systems?
2. PureSwing’s management believes that it must drop the price on the Pure1000 to $800 and on
the Pure5000 to $1,450 to remain competitive in the market. Recalculate profit margins for both
products at these price levels.
3. Describe two ways that PureSwing could cut its costs to get the profit margins back to their
original levels.
89. PharmCo Manufacturing operates a contract manufacturing plant in London, England.
The plant produces a variety of pharmaceutical drugs for companies around the world. Cycle time
is a critical success factor for PharmCo, which has developed a number of measures of
manufacturing speed. The company has studied the matter and found that competitive contract
manufacturers have manufacturing cycle efficiency (MCE) time of about 40 percent. When last
measured, PharmCo’s MCE was 35 percent. At PharmCo, cycle time is defined as beginning at
the point when the order taking is complete.
Some key measures from the most recent month’s production, averaged over all the jobs during
the period, are as follows:
Activity Average Number of Hours
New product development 45
Materials handling 4
Order setup 6
Machine maintenance 4
Order scheduling 2
Inspection of completed order 7
Packaging and move to storage or ship 2
Manufacturing 21
Order taking and verification 2
Raw materials receipt and stocking 6
Inspection of raw materials 2
Required:
1. Determine the MCE time for the most recent month.
2. What can you infer from the MCE time that you calculated?
90. AirTravel Inc. manufactures a wide variety of parts for commercial aircraft, including
airplane engines. The component is purchased by OEM (original equipment manufacturers) such
as Boeing, for use in the larger and more powerful outboards. The units sell for $10,000, and
sales volume averages 2,000 units per year. Recently, AirTravel’s major competitor lowered the
price of the equivalent part to $9,500. The market was very competitive, and AirTravel realized it
had to meet the new price or lose significant market share. The controller assembled the
following data for the most recent year:
Cost and Usage for Production of 2,000 Units
Standard Cost Actual Quantity
Actual Cost
Materials $5,000,000 $7,000,000
Direct labor 2,000,000 2,500,000
Indirect labor 3,800,000 3,500,000
Inspection (hours) 1,000 500,000
Materials handling (number of purchases)
50,000
400,000
Machine setups 3,000 2,000,000
Returns and rework (number of times) 200
100,000
Total $16,000,000
Required:
Calculate the target cost for maintaining current market share and profitability.
