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Chapter 13 - Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing
13-39
13-48 Life-Cycle Costing; Ethics (25 min)
1. Waters’ 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
(research and development, and selling costs, respectively) as well
as the manufacturing costs, is necessary to get an accurate picture of
each product’s overall profitability.
2.
Xderm
Yderm
Total
Sales
$3,000,000
$2,000,000
$5,000,000
Cost of goods sold
$1,900,000
$1,600,000
$3,500,000
Gross profit
$1,100,000
$400,000
$1,500,000
Research and development
$720,000
$180,000
$900,000
Selling expenses
$80,000
$20,000
$100,000
Profit before taxes
$300,000
$200,000
$500,000
The life-cycle product line profitability analysis shows a much different
result. Profit before tax is comparable for the two products.
Now, the two products have the same pre-tax profit margin of 10%.
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 Waters did at
first, may lead to incorrect marketing and management decision
making, as the firm may have a biased and incorrect idea of the most
13-40
13-48 (continued)
3. Tim 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 the same return on sales as the existing product Yderm when life
conflict with his responsibility for integrity under the management
accountant’s code of ethics (chapter 1).
13-49 Life Cycle Costing; Health Care; Discounting (30 min)
If Cure-all were to manufacture the drug in-house, at a sales price of
$235, the life-cycle costs, revenues, and operating income for five
years would be the following:
Price
$235
Units Sold
3,000,000
Revenues
$705,000,000
Costs
R&D
$1,000,000
Clinical Trials
$2,108,000
Manufacturing
Fixed
$5,000,000 × 5 = $25,000,000
Variable
$68×3,000,000 = $204,000,000
Packaging
Fixed
$380,000 × 5 =$1,900,000
Variable
$20 × 3,000,000 = $60,000,000
Distribution
Fixed
$1,125,000 × 5 = $5,625,000
Variable
$6.50 × 3,000,000= $19,500,000
Advertising
Fixed
$2,280,000 × 5 = $11,400,000
Variable
$12 × 3,000,000= $36,000,000
Total Cost
$366,533,000
Operating Income
$338,467,000
13-41
13-49(continued -1)
Outsourcing the manufacturing would result in the following five-year
life cycle costs, revenues, and operating income:
Price
$235
Units Sold
3,000,000
Revenues
$705,000,000
Costs
R&D
$1,000,000
Clinical Trials
$2,108,000
Manufacturing
Fixed
$1,350,000 × 5 =$6,750,000
Variable
$74× 3,000,000= $222,000,000
Packaging
Fixed
$380,000 × 5 = $1,900,000
Variable
$60,000,000
Distribution
Fixed
$1,125,000 × 5 =$5,625,000
Variable
$19,500,000
Advertising
Fixed
$2,280,000 × 5 =$11,400,000
Variable
$36,000,000
Total Cost
$366,283,000
Operating Income
$338,717,000
Outsourcing the manufacturing results in a marginally higher
operating income than manufacturing the drug. Management would
Chapter 13 - Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing
13-42
Problem 13-49(continued -2)
other 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,
perform a calculation for the present value of the annuity, the
$25,000,000 at the end of every year for the next 5 years. Assume a
discount rate of 10%, and the present value of the five-year annuity
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
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
Chapter 13 - Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing
13-44
13-50 Constraint Analysis (Continued)
3. The total incremental costs Bob Peterson will have to pay for this
of 10 days.
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
Chapter 13 - Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing
13-45
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,
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
13-46
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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
themselves out as having a strong commitment to sustainability, they
must be prepared to support those claims with measures of
performance. The management accountant can help identify potential
If there is a potential need for capital investment to implement structural
changes, the management accountant can compare the costs and
benefits of such proposals. This could include a traditional capital
budgeting analysis and post-investment audits.
The information relates to and was adapted from Hau L. Lee, “Don't Tweak Your
Supply Chain--Rethink It End to End,” Harvard Business Review, October 2010, pp.
62-69.
