PROBLEM 19.2A
THE KALLAPUR COMPANY
a.
b.
Target Price = $220
Target Profit = .15 × $220 = $33
Target Cost = $120 – $18 = $102
Target Cost: QUIN
60 Minutes, Strong
Target Cost: KAP1
Target Cost = Target Price – Target Profit
Target Price = $120
Target Profit = .15 × $120 = $18
If fixed overhead is allocated based on units of production, the fixed overhead cost per unit
is equal to $50 calculated as follows:
PROBLEM 19.2A
THE KALLAPUR COMPANY (continued)
c.
Given that it takes 2 hours ($24 total labor cost per unit/$12 per hr. wage rate) to produce
each unit of KAP1 and 5 hours ($60 total labor cost per unit/$12 per hr. wage rate) to
If fixed overhead is allocated on the basis of direct labor hours, the allocation rate per hour
is equal to $16 calculated as follows:
PROBLEM 19.2A
THE KALLAPUR COMPANY (continued)
d.
Allocation Rate
p
er Unit of Activit
y
KAP1 QUIN
30$ 45$
The allocation rates of each overhead activity are calculated as follows:
=
Total Activity Units
Overhead Cost
Total manufacturing cost per unit:
Direct materials cost per unit ……………………………
PROBLEM 19.2A
THE KALLAPUR COMPANY (continued)
e.
Since the cost per unit of KAP1 is below the target cost of $102, it is earning a return
greater than the desired rate. The cost per unit of QUIN is above the target cost of $187, so
it is not earning the desired return.
The only fixed overhead activities that are value-added are machining and shipping. The
proportion of these costs to total fixed overhead is:
PROBLEM 19.2A
THE KALLAPUR COMPANY (concluded)
g
.
KAP1 QUIN
40,000$ 160,000$
400,000 200,000
Total fixed overhead allocated per unit:
Since the cost per unit of KAP1 is above the target cost of $102, it will not earn the desired
15% return. The cost per unit of QUIN is below the target cost of $187, so it will earn a
return greater than the desired rate.
With the new machine, the allocation rate per setup is calculated as follows:
Setup costs (20 × $2,000, 80 × $2,000) …………………
Purchase orders (200 × $2,000, 100 × $2,000) …………
PROBLEM 19.3A
MEIGER MINING
a.
b. Site A Site B
30 Minutes, Medium
Target Cost = Target Price – Target Profit
Target Price = $8
Target Profit = .2 × $8 = $1.60
Tar
g
et Cost = $8 $1.60 = $6.40
40 Minutes, Medium PROBLEM 19.4
A
A
RUSETTA, INC.
a.
Year 1 Year 2
Prevention costs:
Product design 5,000$ 15,000$
Process reengineering 8,000 12,000
Supplier certification 500 2,500
Preventive maintenance 1,300 2,600
Employee quality training 1,200 4,000
b.
ARUSETTA, INC.
Quality Cost Report
Prevention costs increased by $20,100 from Year 1 to Year 2 but external failure costs
only decreased by $2,500. One explanation for this somewhat surprising result is that a
PROBLEM 19.5A
HOME DEPOT
•
b.
•
•
•
The discussion about the impairment of long-lived assets points out that an estimated
net recoverable value is computed on closed facilities. This implies a value-added
consideration of those properties being closed.
Some of the measures used in the 10 year summary table at the end of Appendix A and
under “Store Sales and Other Data” (e.g. weighted average sales per square foot) and
inventory turnover under “Balance Sheet Data and Financial Ratios” show the Home
De
p
ot concern for JIT inventor
y
turnover.
The following items suggest cost information is important in managing the value chain:
Home Depot self insures as reported. This implies that Home Depot analyzed the costs
of purchasing insurance and found it to be non-valued-added.
30 Minutes, Medium
Categories in the Home Depot discussions in Note 1 about the value chain:
R & D and Design. Not much mentioned about this part of the value chain, although the
section on Capitalized Software Costs suggests that R & D associated with software
development is capitalized over the useful life of the software. Thus, Home Depot
engages in development and design of software.
a.
30 Minutes, Medium PROBLEM 19.6
A
KARE COMPAN
Y
a.
b. Year 1 Year 2
c.
||
Year 1
d. Optimum Quality is a moving target, not a fixed point. The prevention and
$ Cost
Quality
Prevention—Quality Training
Year 2
On the graph the prevention and appraisal costs versus the internal and external
failure costs for year 1 and year 2.
PROBLEM 19.7A
BOOKWEB, INC.
a. Activity-based management has two parts:
2.
50 Minutes, Strong
Activity-based management is useful when products consume varied amounts of multiple
resources. That is when product complexity is high and product volume varies significantly
across product lines.
A non-value-added activity is a consumption of firm resources that does not add value to the user
of the service or product. That is, activities that when they are eliminated reduce costs without
Managing activities to change the mix of products away from less profitable to more
profitable products or become a low cost producer of products by eliminating non-value-
added activities.