ACC-3300

Ch 13 Homework

Target Costing; Review of Chapter 11 Morrow Company is a large manufacturer of auto

parts for automakers and parts distributors. Although Morrow has plants throughout the
world, most are in North America. Morrow is known for the quality of its parts and for the
reliability of its operations. Customers receive their orders in a timely manner and there
are no errors in the shipment or billing of these orders. For these reasons, Morrow has
prospered in a business that is very competitive, with competitors such as Delphi,
Visteon, and others.

Morrow just received an order for 100 auto parts from National Motors Corp., a major
auto manufacturer. National proposed a $1,500 selling price per part. Morrow usually
earns 20% operating margin as a percent of sales. Morrow recently decided to use
target costing in pricing its products. An examination of the production costs by the
engineers and accountants showed that this part was assigned a standard full cost of
$1,425 per part (this includes $1,000 production, $200 marketing, and $225 general and
administration costs per part). Morrow’s Value Assessment Group (VAG) undertook a
cost reduction program for this part. Two production areas that were investigated were
the defective unit rate and the tooling costs. The $1,000 production costs included a
normal defective cost of $85 per part. Group leaders suggested that production changes
could reduce defective cost to $25 per part.

Forty-five tools were used to make the auto part. The group discovered that the number
of tools could be reduced to 30 and less expensive tools could be used on this part to
meet National’s product specifications. These changes saved an additional $105 of
production cost per part. By studying other problem areas, the group found that general
and administration costs could be reduced by $50 per unit through use of electronic
data interchange with suppliers and just-in-time inventory management.

In addition, Morrow’s sales manager told the group that National might be willing to pay
a higher selling price because of Morrow’s quality reputation and reliability. He believed
National’s proposed price was a starting point for negotiations. Of course, National had
made the same offer to some of Morrow’s competitors.

Required
What should be Morrow’s target cost per auto part? Explain.
Target cost $1500 desire margin 20% meaning TC=$1500-20%=$1200

As a result of the Value Engineering Group’s efforts, determine Morrow’s estimated cost
for the auto part. Will Morrow meet the target cost for the part? Do you recommend that
Morrow take National’s offer? Explain your reasons.
Saving for manufacturing cost $165
GSA Cost $50
Total coast saving $215
I think total cost savings are not sufficient to get the product total cost down to the
desire target cost. The difference is small so maybe they should pursue the order.

13-45
Theory of Constraints; Strategy Colton Furniture Co. is a small but fast-growing
manufacturer of living room furniture. Its two principal products are end tables and
sofas. The flow diagram for the manufacturing at Colton follows. Colton’s manufacturing
involves five processes: cutting the lumber, cutting the fabric, sanding, staining, and
assembly. One employee cuts fabric and two do the staining. These are relatively
skilled workers who could be replaced only with some difficulty. Two workers cut the
lumber, and two others perform the sanding operation. There is some skill to these
operations, but it is less critical than for staining and fabric cutting. Assembly requires
the lowest skill level and is currently done by one full-time employee and a group of part
timers who provide a total of 175 hours 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, none of the employees can be switched
from one task to another. The current demand for Colton’s products and sales prices
are as follows, although Colton expects demand to increase significantly in the coming
months if it is able to successfully negotiate an order from a motel chain.

End Tables Sofas

Price $250 $450
Current demand (units per month) 400 150
Page 534
Required

What is the most profitable production plan for Colton? Explain your answer with
supporting calculations.

Material cost $100 lumber and sofa $250 (75 lumber and 175 for fabric.
30 min / 60 min= .50 they are working for 35 hours. time available is 2 employee’s x 35
hours x 4 weeks = 280 hours
Assembling 175 x 4 weeks= 700 hours
Cutting fabric 1 x 36 x 4 = 140
Table 250-100material-150margin x constrain time .80= 187.50
Sofa 450-250 material 200 x .3 constrain= 666.67
Sofa is the most profitable.
How would you apply the five steps of the theory of constraints to Colton’s
manufacturing operations? What would you recommend for each step?
-Constrain is staining time
-Establish most beneficial product mix sofa is the most beneficial product mix
-make the most flow c need to find the ways to fasten the staining operation
-c has option to add an employee who can work part time to increase capability of the
constraint.
-think the option of redesigning.

Life-Cycle Costing; Health Care; Present Values Forever Young, Inc., has developed a
drug that will diminish the effects of aging. Forever Young has spent $1,000,000 on
research and development and $2,108,000 for clinical trials. Once the drug is approved
by the FDA, which is imminent, it will have a five-year sales life cycle. Laura Russell,
Forever Young’s chief financial officer, must determine the best alternative for the
company among three options. The company can choose to manufacture, package, and
distribute the drug; outsource only the manufacturing; or sell the drug’s patent. Laura
has compiled the following annual cost information for this drug if the company were to
manufacture it:
Cost Category Fixed Costs Variable Cost per Unit
Manufacturing $5,000,000 $70.00
Packaging 380,000 20.00
Distribution 1,125,000 6.50
Advertising 2,280,000 15.00
Management anticipates a high demand for the drug and has benchmarked $245 per
unit as a reasonable price based on other drugs that promise similar results.
Management expects sales volume of 3,000,000 units over four years and uses a
discount rate of 10%.

If Forever Young; chooses to outsource the manufacturing of the drug while continuing
to package, distribute, and advertise it, the manufacturing costs would result in fixed
costs of $1,350,000 and variable cost per unit of $74. For the sale of the patent, Forever
Young; would receive $300,000,000 now and $25,000,000 at the end of every year for
the next four years.

Required Determine the best option for Forever Young. Support your answer.
Manufacturing for $245:
Price 245 sold 3000000 = 735000000
Cost 1 M TRIALS 2,108,000 manufacturing fixed 5000000*5=25000000 variable
70*3000000=210000000 packing 1900000 + 60000000 distribution 5625000+
19500000 advertising 11400000 + 45000000 total = 378425000- 735000000=
$356575000
Outsourcing will result in cost of 365425000 – 735000000=369575000
It seems like the patent selling is the best option. 300000000+ 25000000*4