Chapter 13 – Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing
13-48 Life-Cycle Costing; Ethics (25 min)
1. Kate Stephen’s analysis based on the prepared report fails to
consider the very significant amount of research and development
and selling costs. It is unlikely that the two products consumed equal
shares of these costs. As the calculations in part 2 below illustrate,
the determination of profitability can be significantly affected by the
2.
Xderm Yderm Total
Sales $2,900,000 $2,000,000 $4,900,000
Cost of goods sold $2,000,000 $1,500,000 $3,500,000
Gross profit $900,000 $500,000 $1,400,000
Research and development $600,000 $200,000 $800,000
Now, Xderm has the lower total profit and Yderm has the higher profit
percentage. This illustrates that including the upstream and
downstream costs can be very important in getting a useful analysis of
product profitability. Failing to include these non-manufacturing costs,
as Kate Stephens did at first, may lead to incorrect marketing and
13-39
Chapter 13 – Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing
13-48 (continued)
3. Kate Stephens should recognize, as the results in part 2 show, that
Xderm is not as profitable on a life cycle basis as it is on a gross margin
basis. In fact, it has a lower return on sales as the existing product
Yderm when life cycle costs are included. She should present the data
13-49 Life Cycle Costing; Health Care; Discounting (30 min)
If Forever Young were to manufacture the drug in-house, at a sales
price of $245, the life-cycle costs, revenues, and operating income
for five years would be the following:
Price $245
Units Sold 3,000,000
Variable $70×3,000,000 = $210,000,000
Packaging
Fixed $380,000 × 4 =$1,520,000
Variable $20 × 3,000,000 = $60,000,000
Distribution
Fixed $1,125,000 × 4 = $4,500,000
13-40
Chapter 13 – Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing
13-49 (coninued -1)
Outsourcing the manufacturing would result in the following four-year
life cycle costs, revenues, and operating income:
Price $245
Units Sold 3,000,000
Revenues $735,000,000
Costs
R&D $1,000,000
Fixed $380,000 × 4 = $1,520,000
Variable $60,000,000
Distribution
Fixed $1,125,000 × 4 =$4,500,000
Variable $19,500,000
Outsourcing the manufacturing results in a marginally higher
operating income than manufacturing the drug. Management would
13-41
Chapter 13 – Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing
Problem 13-49 (continued -2)
It appears that selling the drug patent is the best alternative since
options. However, in order to determine the real value of any of these
alternatives, one should consider the present value of the income
streams. The manufacturing and outsourcing stream would be
identical timing of the cash flows, and so no matter which present
value factor you choose, outsourcing would have the higher net
present value. To determine the present value of selling the patent,
are below). The value is higher than the next best alternative
(outsourcing) even before a present value computation, so, from a
strictly financial point of view, the best alternative is selling the patent.
assumed discount rate = 10.00%
Year
PV factor, year
no.
1 0.9091
2 0.8264
3 0.7513
4 0.6830
13-42
Chapter 13 – Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing
13-50 Constraint Analysis; Flow Diagram (Appendix) (60 min)
1. Grace Vander’s accelerated delivery schedule is unsatisfactory in
cutting 10 days from the total project schedule because not all of her
crashed activities are included on the critical path. The critical path is
ABGEFJK, 65 days, the longest path through the diagram.
2. Below is a revised accelerated delivery schedule that meets both
objectives: (1) delivery of the first plane two week (10 working days)
ahead of schedule, and (2) at least incremental cost to Coastal. All
the paths need to be evaluated when reducing a project’s completion
Activity
Crashed
Days
Reduced
Incremental
Cost per
day
Incremental
Cost
ABGEFIJ ABGHIJ ABEFIJ ABCDEFIJ
START 65 53 45 64
FI 1 $ 400 $ 400 64 53 44 63
EF 1 800 800 63 53 43 62
IJ 1 900 900 62 52 42 61
BG 2 1,000 2,000 60 50 42 61
13-43
Chapter 13 – Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing
13-50 Constraint Analysis (Continued)
3. The total incremental costs Bob Peterson will have to pay for this
4. The fact that Silver line’s management can open negotiations with a
customer regarding the tradeoff between price and timing of delivery
indicates there is a potential to differentiate Silver Line on the basis of
delivery schedules. Rather than wait until a customer approaches
Chapter 13 – Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing
13-51 Research Assignment, Sustainability and the Supply Chain (40
min)
1.
Organizations are facing mounting pressures to show that they are
operating in a social and environmentally sustainable manner. Since
2.
The stakeholders include customers, shareholders, boards, employees,
governments, and non-governmental organizations. In addition, the
3.
A structural change is more comprehensive than a simple change, like
using more energy efficient vehicles. Rather, structural changes occur
at a much grander scale. The article notes that Is may include
innovations in production processes or developing fundamentally
different relationships with business partners, and may even encompass
13-45
13-51 Research Assignment (Continued)
4.
The management accountant can play a role in both the measurement
and monitoring of environmental impact and in the evaluation of any
capital expenditure proposals related to potential structural changes.
If an organization and its supply chain partners are going to hold
62-69.