91. Amanda Jones owns and operates Motorcycle Rentals Inc. (MRI). Customers can rent a
motorcycle in one city and then return it at one of three designated cities. Following are the costs
involved in providing this service each year:
Fixed Variable
Maintenance $25,000 $25.00
Licenses and permits 4,000 –
Vehicle lease 100,000 –
Building lease 16,000 –
Marketing 32,000 1.50
Operating costs 88,000 16.0
Motorcycle Rentals Inc. began business two years ago with a $400,000 expenditure for a fleet of
45 motorcycles. These are expected to last five more years, at which time a new fleet will be
purchased. Amanda is satisfied with the steady average rentals per year of 10,000.
Required:
1. What price should Amanda charge per rental for the business to make a twenty percent life
cycle profit?
2. What price should Amanda charge per rental for the business to make a before-tax thirty
percent return on investment?
92. 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 Mfg. Overhead 700,000
Fixed Selling and Administrative 200,000
Batch-level Fixed Mfg. 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.
93. 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 40.0%
Comfort 50 20.0%
Atmosphere 100 40.0%
Total 250 100%
Second: Product Components and Cost
Cost Percent of Total
Food Preparation $5 21.7%
Wait Staff 15 65.2%
Food Ingredients 3 13.0%
Total $23 100%
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.
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.
94. High Point Furniture manufactures a high-quality dining table, which is offered in both
oak and walnut. The demand for the tables is 800 units for the oak table and 1500 for the walnut
table. The tables are priced at $495 and $995 for the oak and walnut tables, respectively. The
materials cost is $210 for the oak table and $430 for the walnut table. In addition, High Point has
the following manufacturing information for the four manufacturing processes (receiving,
preparation, assembly, and finishing), showing the amount of time (in minutes) required for each
table for each process, and the total minutes of time available for each process.
Time
Required/unit
Time
Name Oak Walnut Available
Receiving 25 50 100,000
Preparation 80 120 250,000
Assembly 100 250 400,000
Finishing 60 40 120,000
Required:
1. Which process(es), if any, are constraints for the current level of demand?
2. Given any constraints identified in part (1) above, determine the best production and sales
plan for the two types of tables.
3. What is the overall contribution from the production plan you determined in part (2) above?
95. Life Cycle Costing Income Statements
The following revenue and cost data are for Turner Manufacturing’s two radial saws. The L40 is
for the commercial market and the L50 is for industrial customers. Both products are expected to
have three-year life cycles.
L40 ($ in thousands) 2014 2015 2016
Revenues $800 $2,300 $3,100
Costs
Research and development 1,400 – –
Prototypes 350 50 –
Marketing 60 600 475
Distribution 60 120 130
Manufacturing 20 770 1,350
Customer service – 60 85
Total cost $1,890 $1,600 $2,040
Operating profit ($1,090) $700 $1,060
L50 ($ in thousands) 2014 2015 2016
Revenues $900 $1,900 $2,200
Costs
Research and development 650 – –
Prototypes 300 30 10
Marketing 124 200 260
Distribution 170 200 410
Manufacturing 85 700 770
Customer service – 20 300
Total cost $1,329 $1,150 $1,750
Operating profit ($429) $750 $450
Required:
1. How would a product life-cycle income statement differ from the above income statements?
2. Prepare a three-year life-cycle income statement for both products. Which product appears to
be more profitable and why?
3. Prepare a schedule showing each cost category as a percentage of total annual costs. What
do you think this indicates about the profitability of each product over the three-year life cycle?