EXERCISE 5-33 (30 MINUTES)
1.
ZODIAC MODEL ROCKETRY COMPANY
COMPUTATION OF SELLING COSTS
BY ORDER SIZE AND PER MOTOR WITHIN EACH ORDER SIZE
Order Size
Medium
Large
Small
Sales commissionsa
(Unit cost: $675,000/225,000
= $3.00 per box)....................................................
$ 6,000
$135,000
box)
Total
$534,000
$ 675,000
Catalogsb
(Unit cost: $295,400/590,800
= $.50 per catalog) ...............................................
127,150
105,650
catalog)
62,600
295,400
Costs of catalog salesc
(Unit cost: $105,000/175,000
= $.60 per motor) ..................................................
47,400
31,200
skein)
26,400
105,000
Credit and collectiond
(Unit cost: $60,000/6,000
= $10.00 per order) ...............................................
4,850
24,150
order)
31,000
60,000
Total cost for all orders of a
given size .....................................................................
$185,400
$296,000
$654,000
$1,135,400
Units (motors) solde ....................................................
103,000
592,000
2,180,000
Unit cost per order of a given
sizef ..............................................................................
$1.80
$.50
$.30
aRetail
sales in boxesunit cost:
Small, 2,000$3
Medium, 45,000$3
Large, 178,000$3
bCatalogs distributedunit cost
cCatalog salesunit cost
dNumber of retail ordersunit cost
eSmall: (2,00012) + 79,000 = 103,000
Medium: (45,00012) + 52,000 = 592,000
Large: (178,00012) + 44,000 = 2,180,000
fTotal cost for all orders of a given size ÷ units sold
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5-1
EXERCISE 5-33 (CONTINUED)
2.
The analysis of selling costs shows that small orders cost more than large orders.
This fact could persuade management to market large orders more aggressively
and/or offer discounts for them.
EXERCISE 5-40 (40 MINUTES, PLUS TIME AT RESTAURANT)
Several restaurant activities are listed in the following table, along with the required
characteristics for each activity. Many other possibilities could be listed, depending on the
level of detail.
Activity Description
Value-Added
or Non-ValueAdded
Taking reservations
VA
Customer calls on
phone
Customer desires
reservation
Customers waiting
for a table
NVA
Customer arrives, but
no table is ready
An error was made in
reservation; service is slow;
customers are slow;
customers arrive without
reservations
Seating customers
VA
Table becomes
available
Customer's reservation (or
turn in line) comes up; table
becomes ready
Taking orders
VA
Customers indicate
readiness to order
Kitchen staff needs to know
what to prepare
Serving meals to
customers
VA
Meals are ready
Meals are ready; customers
are hungry
Returning meal to
kitchen for revised
preparation
NVA
Customer complains
about meal
An error was made in
explaining the menu; there
is an error in the printed
menu description; meal was
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Root Cause
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prepared wrong; customer
is picky
Customers eating
meal
VA
Meals are served and
are satisfactory
Customers are hungry
Clearing the table
VA
Customers are
finished
Customers have finished
eating
EXERCISE 5-40 (CONTINUED)
Delivering check to
table
VA
Customers are
finished ordering and
eating
Customers need to know
amount of bill
Collecting payment
VA
Customers have
produced cash or
credit card
Restaurant needs to collect
payment for services
rendered
EXERCISE 5-44 (20 MINUTES)
There are many key activities that can be suggested for each business. Some possibilities
are listed below. After each activity, a suggested cost driver is given in parentheses.
(1)
airline:
(a)
(b)
(c)
(d)
(e)
reservations (reservations booked)
baggage handling (pieces of baggage handled)
flight crew operations (air miles flown)
aircraft operations (air miles flown)
in-flight service (number of passengers)
(2)
restaurant
(a)
(b)
(c)
(d)
(e)
purchasing (pounds or cost of food purchased)
kitchen operations (meals prepared)
table service (meals served)
table clearing (meals served)
dish washing (dishes washed)
(3)
fitness club:
(a)
(b)
(c)
(d)
(e)
front desk operations (number of patrons)
membership records (number of records)
personnel (number of employees)
equipment maintenance (maintenance hours)
fitness consultation (hours of service)
(4)
bank:
(a)
teller window operations (number of customers)
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(b)
(c)
(d)
(e)
loan processing (loan applications)
check processing (checks processed)
personnel (number of employees)
security (number of customers)
(5) hotel:
(a)
(b)
(c)
(d)
(e)
front desk operations (number of guests)
bell service (pieces of luggage handled)
housekeeping service (number of guest-days)
room service (meals delivered)
telephone service (phone calls made)
(6)
(a)
(b)
(c)
(d)
(e)
admissions (patients admitted)
diagnostic lab (tests performed)
nursing (nursing hours)
surgery (hours in operating room)
general patient care (patient-days of care)
hospital:
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solutions to Problems
PROBLEM 5-45 (35 MINUTES)
1.
Activity-based costing results in improved costing accuracy for two reasons. First,
companies that use ABC are not limited to a single driver when allocating costs to
products and activities. Not all costs vary with units, and ABC allows users to select
a host of nonunit-level cost drivers. Second, consumption ratios often differ greatly
among activities. No single cost driver will accurately assign costs for all activities
in this situation.
2.
Allocation of administrative cost based on billable hours:
E-commerce consulting: 2,400 ÷ 6,000 = 40%; $381,760 x 40% = $152,704
Information systems: 3,600 ÷ 6,000 = 60%; $381,760 x 60% = $229,056
E-Commerce
Consulting
Information
Systems
Services
Billings:
3,600 hours x $140…………
2,400 hours x $140…………
Less: Professional staff cost:
3,600 hours x $50
2,400 hours x $50
Administrative cost…….
Income……………………………
(120,000)
(152,704)
$ 63,296
( 229,056)
$ 94,944
Income ÷ billings……………….
18.84%
18.84%
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$504,000
$336,000
(180,000)
© 2009 The McGraw-Hill Companies, Inc.
5-5
PROBLEM 5-45 (CONTINUED)
3. Activity-based application rates:
Activity
Activity
Driver
Cost
Staff support
In-house
computing
$207,000
145,000
Miscellaneous
office charges
29,760
Application
Rate
÷ 300 clients
=
$690 per client
÷ 5,000 computer
hours (CH)
=
$29 per CH
÷ 1,200 client
transactions (CT)
=
$24.80 per CT
Staff support, in-house computing, and miscellaneous office charges of e-commerce
consulting and information systems services:
Activity
Staff support:
240 clients x $690…………...
60 clients x $690…………….
In-house computing:
2,900 CH x $29……………….
2,100 CH x $29……………….
Miscellaneous office charges:
480 CT x $24.80……………...
720 CT x $24.80……………...
Total ……………………………….
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E-Commerce
Consulting
Information
Systems
Services
$165,600
$ 41,400
84,100
60,900
11,904
17,856
$120,156
$261,604
© 2009 The McGraw-Hill Companies, Inc.
5-6
PROBLEM 5-45 (CONTINUED)
Profitability e-commerce consulting and information systems services:
E-Commerce
Consulting
Billings:
3,600 hours x $140………..
2,400 hours x $140………..
Less: Professional staff cost:
3,600 hours x $50
2,400 hours x $50
Administrative cost…….
Income…………………………..
Income ÷ billings……………...
Information
Systems
Services
$504,000
$336,000
(180,000)
(120,000)
(120,156)
$ 95,844
28.53%
( 261,604)
$ 62,396
12.38%
4.
Yes, his attitude should change. Even though both services are needed and
professionals are paid the same rate, the income percentages show that e-commerce
consulting provides a higher return per sales dollar than information systems
services (28.53% vs. 12.38%). Thus, all other things being equal, professionals
should spend more time with e-commerce.
5.
Probably not. Although both services produce an attractive return for Clark and
Shiffer, the firm is experiencing a very tight labor market and will likely have trouble
finding qualified help. In addition, the professional staff is currently overworked,
which would probably limit the services available to new clients.
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PROBLEM 5-46 (60 MINUTES)
1.
The predetermined overhead rate is calculated as follows:
Predetermined overhead rate = Budgeted manufacturing overhead/budgeted directlabor hours = $1,224,000/102,000* = $12 per hour
*Direct labor, budgeted hours:
REG: 5,000 units  9 hours .....................................
ADV: 4,000 units  11 hours ...................................
SPE: 1,000 units  13 hours ....................................
Total direct-labor hours ........................................................
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45,000 hours
44,000 hours
13,000 hours
102,000 hours
© 2009 The McGraw-Hill Companies, Inc.
5-8
PROBLEM 5-46 (CONTINUED)
2. Activity-based-costing analysis:
Activity
Activity
Cost Pool
Cost
Driver
Machine
Hours
Cost
Driver
Quantity
Pool
Rate
Machine
Related
$310,500
Material
Hand.
52,500
Prod.
Runs
100
525.00
Purch.
75,000
Purch.
Orders
300
250.00
Setup
85,000
Prod.
Runs
100
850.00
Inspect.
27,500
Inspect.
Hours
1,100
25.00
Ship.
66,000
Ship.
1,100
60.00
Eng.
32,500
Eng.
Hours
650
50.00
Fac.
575,000
115,000
5.00
Grand
Total
$1,224,000
Machine
Hours
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115,000 $ 2.70
Product
Line
REG
ADV
GMT
Total
REG
ADV
GMT
Total
REG
ADV
GMT
Total
REG
ADV
GMT
Total
REG
ADV
GMT
Total
REG
ADV
GMT
Total
REG
ADV
GMT
Total
REG
ADV
GMT
Total
Grand
Total
Cost
Driver
Quantity
for
Product
Line
50,000
48,000
17,000
115,000
40
40
20
100
100
96
104
300
40
40
20
100
400
400
300
1,100
500
400
200
1,100
250
200
200
650
50,000
48,000
17,000
115,000
Activity
Cost for
Product
Line
$135,000
129,600
45,900
$310,500
$ 21,000
21,000
10,500
$ 52,500
$ 25,000
24,000
26,000
$ 75,000
$ 34,000
34,000
17,000
$ 85,000
$ 10,000
10,000
7,500
$ 27,500
$ 30,000
24,000
12,000
$ 66,000
$ 12,500
10,000
10,000
$ 32,500
$250,000
240,000
85,000
$575,000
Product
Line
Prod.
Volume
Activity
Cost per
Unit of
Product
5,000 $27.00
4,000 32.40
1,000 45.90
5,000
4,000
1,000
4.20
5.25
10.50
5,000
4,000
1,000
5.00
6.00
26.00
5,000
4,000
1,000
6.80
8.50
17.00
5,000
4,000
1,000
2.00
2.50
7.50
5,000
4,000
1,000
6.00
6.00
12.00
5,000
4,000
1,000
2.50
2.50
10.00
5,000
4,000
1,000
50.00
60.00
85.00
$1,224,000
© 2009 The McGraw-Hill Companies, Inc.
5-9
PROBLEM 5-46 (CONTINUED)
3.
Calculation of new product costs under ABC.
Direct material.................................
Direct labor (not including
set-up time) ................................
Total direct costs per unit..............
REG
$129.00
ADV
$151.00
GMT
$203.00
171.00 (9 hr. @ $19)
$300.00
209.00 (11 hr. @ $19)
$360.00
247.00 (13 hr. @ $19)
$450.00
$ 32.40
5.25
6.00
8.50
2.50
6.00
2.50
60.00
$ 45.90
10.50
26.00
17.00
7.50
12.00
10.00
85.00
$123.15
$483.15
$213.90
$663.90
Manufacturing overhead (based on ABC):
Machine-related .........................
$ 27.00
Material handling.......................
4.20
Purchasing.................................
5.00
Setup ..........................................
6.80
Inspection ..................................
2.00
Packing/shipping ......................
6.00
Engineering design ...................
2.50
Facility ........................................
50.00
Total ABC overhead
cost per unit...............................
$103.50
Total product cost per unit ............
$403.50
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5-10
PROBLEM 5-46 (CONTINUED)
4.
Comparison of costs and target prices under two alternative product-costing
systems:
Reported unit overhead cost:
Traditional, volume-based costing system............
Activity-based costing system ...............................
Reported unit product cost (direct material, direct
labor and overhead):
Traditional, volume-based costing system............
Activity-based costing system ...............................
Sales price data:
Original target price (130% of product cost based
on traditional, volume-based costing system) ......
New target price (130% of product cost based
activity-based costing system) ...............................
Actual current selling price .........................................
5.
REG
ADV
GMT
$108.00
103.50
$132.00
123.15
$156.00
213.90
408.00
403.50
492.00
483.15
606.00
663.90
530.40
639.60
787.80
524.55
628.10
863.07
525.00
628.00
800.00
The REG and ADV products were overcosted by the traditional system, and the
GMT product was undercosted by the traditional system
Reported unit product cost:
Traditional, volume-based costing system............
Activity-based costing system ...............................
Cost distortion:
REG and ADV overcosted by traditional system ..
GMT undercosted by traditional system ................
$408.00
403.50
$492.00
483.15
$ 4.50
$ 8.85
$606.00
663.90
($ 57.90)
6.
The electronic version of the Solutions Manual “BUILD A SPREADSHEET
SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website:
www.mhhe.com/hilton8e.
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5-11
PROBLEM 5-48 (30 MINUTES)
1.
Deluxe manufacturing overhead cost:
32,000 machine hours x $80 = $2,560,000
$2,560,000 ÷ 16,000 units = $160 per unit
Executive manufacturing overhead cost:
45,000 machine hours x $80 = $3,600,000
$3,600,000 ÷ 30,000 units = $120 per unit
Deluxe
Executive
$ 40
25
160
$225
$ 65
25
120
$210
Direct material……………….
Direct labor…………………..
Manufacturing overhead….
Unit cost…………………
2. Activity-based application rates:
Activity
Driver
Application
Rate
Activity
Cost
Manufacturing
setups
$1,344,000
÷ 160 setups (SU)
= $8,400 per SU
Machine
processing
3,696,000
÷ 77,000 machine
hours (MH)
= $48 per MH
Product
shipping
1,120,000
÷ 350 outgoing
= $3,200 per OS
shipments (OS)
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5-12
PROBLEM 5-48 (CONTINUED)
Manufacturing setup, machine processing, and product shipping costs of a
Deluxe unit and an Executive unit:
Activity
Manufacturing setups:
100 SU x $8,400……………..
60 SU x $8,400……………..
Machine processing:
32,000 MH x $48…………...
45,000 MH x $48…………...
Product shipping:
200 OS x $3,200……………
150 OS x $3,200……………..
Total …………………………….
Deluxe
Executive
$ 840,000
$ 504,000
1,536,000
2,160,000
640,000
$3,016,000
480,000
$3,144,000
Production volume (units)….
16,000
30,000
Cost per unit…………………..
$188.50*
$104.80**
* $3,016,000 ÷ 16,000 units = $188.50
** $3,144,000 ÷ 30,000 units = $104.80
The manufactured cost of a Deluxe cabinet is $253.50, and the manufactured cost
of an Executive cabinet is $194.80. The calculations follow:
Direct material…………………………………
Direct labor…………………………………….
Manufacturing setup, machine
processing, and outgoing shipments..
Total cost……………………………………….
Deluxe
Executive
$ 40.00
25.00
$ 65.00
25.00
188.50
$253.50
104.80
$194.80
3. The Deluxe storage cabinet is undercosted. The use of machine hours produced
a unit cost of $225; in contrast, the more accurate activity-based-costing
approach shows a unit cost of $253.50. The difference between these two
amounts is $28.50.
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5-13
PROBLEM 5-48 (CONTINUED)
4. Cost distortion:
The Deluxe cabinet product line is undercosted by $456,000, and the Executive
cabinet product line is overcosted by $456,000. Supporting calculations follow:
Deluxe
5.
Executive
$28.50*  16,000 = $456,000
$(15.20)†  30,000 = $(456,000)
*$253.50  $225.00
†$194.80
 $210.00
No, the discount is not advisable. The regular selling price of $270, when
compared against the more accurate ABC cost figure, shows that each sale
provides a profit to the firm of $16.50 ($270.00 - $253.50). However, a $30 discount
will actually produce a loss of $13.50 ($253.50 - $240.00), and the more units that
are sold, the larger the loss. Notice that with the less-accurate, machine-hourbased figure ($225), the marketing manager will be misled, believing that each
discounted unit sold would boost income by $15 ($240 - $225).
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5-14
PROBLEM 5-49 (25 MINUTES)
1.
a.
Manufacturing overhead costs include all indirect manufacturing costs (all
production costs except direct material and direct labor). Typical overhead costs
include:
 Indirect labor (e.g., a lift-truck driver, maintenance and inspection labor,
engineering labor, and supervisors).
 Indirect material.
 Other indirect manufacturing costs (e.g., building maintenance, machine and
tool maintenance, property taxes, insurance, depreciation on plant and
equipment, rent, and utilities).
b.
Companies develop overhead rates before production to facilitate the costing of
products as they are completed and shipped, rather than waiting until actual
costs are accumulated for the period of production.
2.
The increase in the overhead rate should not have a negative impact on the
company, because the increase in indirect costs was offset by a decrease in
direct labor.
3.
Rather than using a plantwide overhead rate, Digital Light could implement
separate activity cost pools. Examples are as follows:
 Separate costs into departmental overhead accounts (or other relevant pools),
with one account for each production and service department. Each
department would allocate its overhead to products on the basis that best
reflects the use of these overhead services.
 Treat individual machines as separate cost centers, with the machine costs
collected and charged to the products using machine hours.
4.
An activity-based costing system might benefit Digital Light because it assigns
costs to products according to their usage of activities in the production process.
More accurate product costs are the result.
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© 2009 The McGraw-Hill Companies, Inc.
5-15
PROBLEM 5-50 (30 MINUTES)
1.
Predetermined overhead rate = budgeted overhead ÷ budgeted direct-labor hours
= $710,000 ÷ 20,000* = $35.50 per direct labor hour
*20,000 budgeted direct-labor hours = (2,500 units of Medform)(3 hrs./unit) +
(3,125 units of Procel)(4 hrs./unit)
Direct material ................................
Direct labor:
3 hours x $15 .............................
4 hours x $15 .............................
Manufacturing overhead:
3 hours x $35.50 ........................
4 hours x $35.50 ........................
Total cost ........................................
2.
Medform
Procel
$ 30.00
$ 45.00
45.00
60.00
106.50
$181.50
142.00
$247.00
Activity-based overhead application rates:
Activity
Cost
Activity Cost
Driver
Application
Rate
Order
processing
$120,000
÷ 600 orders
processed (OP)
= $200 per OP
Machine
processing
500,000
÷ 50,000 machine
hrs. (MH)
= $10 per MH
Product
inspection
90,000
÷ 15,000 inspection
hrs. (IH)
= $6 per IH
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5-16
PROBLEM 5-50 (CONTINUED)
Order processing, machine processing, and product inspection costs of a
Medform unit and an Procel unit:
Activity
Order processing:
350 OP x $200 .......................
250 OP x $200 .......................
Machine processing:
23,000 MH x $10 ....................
27,000 MH x $10 ....................
Product inspection:
4,000 IH x $6 ........................
11,000 IH x $6 ........................
Total
Production volume (units)
Cost per unit
Medform
Procel
$ 70,000
$ 50,000
230,000
270,000
24,000
$324,000
66,000
$386,000
2,500
$129.60*
3,125
$123.52**
* $324,000 ÷ 2,500 units = $129.60
** $386,000 ÷ 3,125 units = $123.52
The manufactured cost of a Medform unit is $204.60, and the manufactured cost
of a Procel unit is $228.52:
Direct material……………………………….
Direct labor:
3 hours x $15……………………………
4 hours x $15……………………………
Order processing, machine processing,
and product inspection………………..
Total cost…………………………………….
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Medform
Procel
$ 30.00
$ 45.00
45.00
60.00
129.60
$204.60
123.52
$228.52
© 2009 The McGraw-Hill Companies, Inc.
5-17
PROBLEM 5-50 (CONTINUED)
3.
a.
The Procel product is overcosted by $18.48 ($247.00 - $228.52) under the
traditional product-costing system. The labor-hour application base
resulted in a $247 unit cost; in contrast, the more accurate ABC approach
yielded a lower unit cost of $228.52. The opposite situation occurs with
the Medform product, which is undercosted by $23.10 under the traditional
approach ($181.50 vs. $204.60 under ABC).
The traditional costing system overcosts the Procel product line by a total
of $57,750 ($18.48 x 3,125 units), and it undercosts the Medform product
line by the same amount, $57,750 ($23.10 x 2,500 units).
b.
4.
Yes, especially since Meditech’s selling prices are based heavily on cost.
An overcosted product will result in an inflated selling price, which could
prove detrimental in a highly competitive marketplace. Customers will be
turned off and will go elsewhere, which hurts profitability. With
undercosted products, selling prices may be too low to adequately cover a
product’s more accurate (higher) cost. This situation is also troublesome
and will result in lower income reported for the company.
The electronic version of the Solutions Manual “BUILD A SPREADSHEET
SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website:
www.mhhe.com/hilton8e.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc.
5-18
PROBLEM 5-51 (30 MINUTES)
1.
Valdosta Vinyl Company (VVC) is currently using a plantwide overhead rate that is
applied on the basis of direct-labor dollars. In general, a plantwide manufacturingoverhead rate is acceptable only if a similar relationship between overhead and direct
labor exists in all departments or the company manufactures products that receive the
same proportional services from each department
In most cases, departmental overhead rates are preferable to plantwide
overhead rates because plantwide overhead rates do not provide the following:
 A framework for reviewing overhead costs on a departmental basis, identifying
departmental cost overruns, or taking corrective action to improve departmental
cost control.
 Sufficient information about product profitability, thus increasing the difficulties
associated with management decision making.
2.
Because the company uses a plantwide overhead rate applied on the basis of directlabor dollars, the elimination of direct labor in the Molding Department through the
introduction of robots may appear to reduce the overhead cost of the Molding
Department to zero. However, this change will not reduce fixed manufacturing costs
such as depreciation and plant supervision. In reality, the use of robots is likely to
increase fixed costs because of increased depreciation. Under the current method of
allocating overhead costs, these costs merely will be absorbed by the remaining
departments.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc.
5-19
PROBLEM 5-51 (CONTINUED)
3.
a.
In order to improve the allocation of overhead costs in the Cutting and Finishing
departments, management should move toward an activity-based costing system.
The firm should:
 Establish activity-cost pools for each significant activity.
 Select a cost driver for each activity that best reflects the relationship of the
activity to the overhead costs incurred.
b.
In order to accommodate the automation of the Molding Department in its
overhead accounting system, the company should:
 Establish a separate overhead pool and rate for the Molding Department.
 Identify fixed and variable overhead costs and establish fixed and variable
overhead rates.
 Apply overhead costs to the Molding Department on the basis of robot or
machine hours.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc.
5-20
PROBLEM 5-52 (40 MINUTES)
1.
Overhead to be assigned to development chemical order:
Activity Cost
Pool
Machine setups
Material handling
Hazardous waste control
Quality control
Other overhead costs
Pool
Rate
$4,000 per setup
$4 per pound
$10 per pound
$150 per inspection
$20 per machine
hour





Level of
Cost Driver
6 setups
9,000 pounds
2,100 pounds
8 inspections
550 machine hours
Total
Assigned
Overhead
Cost
$24,000
36,000
21,000
1,200
11,000
$93,200
2.
Overhead cost per
box of chemicals
=
$93,200
 $93.20 per box
1,000 boxes
3.
Predetermined
overhead rate
=
totalbudgetedoverheadcost $2,500,000

totalbudgetedmachine hours
40,000
= $62.50 per machine hr.
4.
Overhead to be assigned to film development chemical order, given a single
predetermined overhead rate:
a.
Total overhead assigned
= $62.50 per machine hr.  550 machine hr.
= $34,375
b.
5.
Overhead cost per
box of chemicals
=
$34,375
 $34.375 per box
1,000 boxes
The radiological development chemicals entail a relatively large number of machine
setups, a large amount of hazardous materials, and several inspections. Thus, they
are quite costly in terms of driving overhead costs. Use of a single predetermined
overhead rate obscures this characteristic of the production job. Underestimating the
overhead cost per box could have adverse consequences for Rapid City Radiology,
Inc. For example, it could lead to poor decisions about product pricing. The activitybased costing system will serve management much better than the system based on a
single, predetermined overhead rate.
PROBLEM 5-52 (CONTINUED)
McGraw-Hill/Irwin
Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc.
5-21
6.
The electronic version of the Solutions Manual “BUILD A SPREADSHEET
SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website:
www.mhhe.com/hilton8e.
PROBLEM 5-53 (20 MINUTES)
1. Calculation of unit cost:
(a)
Overhead assigned to plates:
Activity Cost
Pool
Pool
Rate
Machine setups
$4,000 per setup
Material handling
$4 per pound
Hazardous waste control
$10 per pound
Quality control
$150 per inspection
Other overhead costs
$20 per machine hour
Total
Overhead cost per unit 
(b)





Level of
Cost Driver
4 setups
800 pounds
400 pounds
4 inspections
60 machine hours
Assigned
Overhead
Cost
$16,000
3,200
4,000
600
1,200
$25,000
$25,000
 $250
100 plates
Unit cost per plate:
Direct material ...............................
Direct labor ....................................
Manufacturing overhead ..............
Total cost per plate .......................
$210
60
250
$520
2. The electronic version of the Solutions Manual “BUILD A SPREADSHEET
SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website:
www.mhhe.com/hilton8e.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc.
5-22
PROBLEM 5-54 (50 MINUTES)
1.
Activity Cost Pool
I:
Machine-related costs
II: Setup and inspection
III: Engineering
IV: Plant-related costs
2.
Calculation of pool rates:
Type of Activity
Unit-level
Batch-level
Product-sustaining-level
Facility-level
I: Machine-related costs:
$1,800,000
= $100 per machine hr.
18,000 machine hrs.
II. Setup and inspection:
$720,000
80 runs
= $9,000 per run
III. Engineering:
$360,000
= $1,800 per change order
200 change orders
IV. Plant-related costs:
$384,000
= $100 per sq. ft.
3,840 sq. ft.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc.
5-23
PROBLEM 5-54 (CONTINUED)
3.
Unit costs for odds and ends:
I: Machine-related costs:
Odds: $100 per machine hr.8 machine hr. per unit
= $800 per unit
Ends: $100 per machine hr.2 machine hr. per unit
= $200 per unit
II: Setup and inspection:
Odds: $9,000 per run ÷ 25 units per run
= $360 per unit
Ends: $9,000 per run ÷ 125 units per run
= $72 per unit
III: Engineering:
Odds:
$1,800 per change order  200 change orders 75%
1,000 units
=
Ends:
$270,000
= $270 per unit
1,000 units
$1,800 per change order  200 change orders 25%
5,000 units
=
$90,000
= $18 per unit
5,000 units
IV. Plant-related costs:
Odds:
$100 per sq. ft.  3,840 sq. ft.  80%
1,000 units
=
Ends:
$100 per sq. ft.  3,840 sq. ft.  20%
5,000 units
=
McGraw-Hill/Irwin
Managerial Accounting, 8/e
$307,200 = $307.20 per unit
1,000 units
$76,800 = $15.36 per unit
5,000 units
© 2009 The McGraw-Hill Companies, Inc.
5-24
PROBLEM 5-54 (CONTINUED)
4.
New product cost per unit using the ABC system:
Odds
Direct material ......................................................................
$ 160.00
Direct labor...........................................................................
120.00
Manufacturing overhead:
Machine-related ............................................................
800.00
Setup and inspection....................................................
360.00
Engineering ...................................................................
270.00
Plant-related ..................................................................
307.20
Total cost per unit................................................................
$2,017.20
5.
200.00
72.00
18.00
15.36
$725.36
New target prices:
Odds
New product cost (ABC) .....................................................
$2,017.20
Pricing policy .......................................................................
 120%
New target price ...................................................................
$2,420.64
6.
Ends
$240.00
180.00
Ends
$725.36
 120%
$870.43 (rounded)
Full assignment of overhead costs:
Odds
Ends
Manufacturing overhead costs:
Machine-related ............................................................
$ 800.00 $ 200.00
Setup and inspection ...................................................
360.00
72.00
Engineering ...................................................................
270.00
18.00
Plant-related ..................................................................
307.20
15.36
Total overhead cost per unit ...............................................
$1,737.20 $ 305.36
 Production volume ...........................................................
 1,000  5,000
Total overhead assigned .....................................................
$1,737,200 $1,526,800
Total = $3,264,000
McGraw-Hill/Irwin
Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc.
5-25
PROBLEM 5-54 (CONTINUED)
7.
Cost distortion:
Odds
Traditional volume-based costing system:
reported product cost ..................................................
Activity-based costing system:
reported product cost ..................................................
Amount of cost distortion per unit .....................................
$
Ends
664.00
$996.00
2,017.20
$(1,353.20)
725.36
$270.64
Traditional
system
undercosts
odds by
$1,353.20
per unit
Production volume ..............................................................  1,000
Total amount of cost distortion for entire
product line ................................................................... $(1,353,200)
Traditional
system
overcosts
ends by
$270.64
per unit
 5,000
$1,353,200
Sum of these two
amounts is zero.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc.
5-26
PROBLEM 5-60 (60 MINUTES)
1.
Based on the cost data from Gigabyte's traditional, volume-based product-costing
system, product G is the firm's least profitable product. Its reported actual gross
margin is only $66.00, as compared with $254.25 and $313.50 for products T and W,
respectively. However, the validity of this conclusion depends on the accuracy of the
product costs reported by Gigabyte's product-costing system.
2.
Again, based on the product costs reported by the firm's traditional, volume-based
product-costing system, product W appears to be very profitable. As in requirement
(1), however, the validity of this assessment depends on the accuracy of the reported
product costs.
3.
Gigabyte's competitors have moved aggressively into the market for gismos (product
G), but they have abandoned the whatchamacallit (product W) market to Gigabyte.
These competing firms apparently believe they can sell gismos at a much
lower price than Gigabyte's management feels is feasible. This evidence suggests that
Gigabyte's competitors may believe their product cost for gismos is below Gigabyte's
reported product cost. In contrast, Gigabyte's competitors apparently believe that
they cannot afford to sell whatchamacallits at Gigabyte's current price of $600.
Perhaps the competing firms' reported production costs for product W are higher than
the cost reported by Gigabyte's product-costing system.
The danger to Gigabyte is that the company will be forced out of the market for
its second largest selling product. This could be disastrous to Gigabyte, Inc.
4.
Percentages for raw-material costs:
Product
G
T
W
Total
Raw-Material
Cost per Unit
$105.00
157.50
52.50
Annual
Volume
8,000
15,000
4,000
Annual
Raw-Material
Cost
$ 840,000
2,362,500
210,000
$3,412,500
Percentage
of Total
Raw-Material
Cost*
25%
69%
6%
100%
*Percentages rounded to nearest whole percent.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc.
5-27
PROBLEM 5-60 (CONTINUED)
5.
Product costs based on an activity-based costing system:
Product
G
Direct material ................................................
Direct labor .....................................................
Machinerya ......................................................
Machine setupb ..............................................
Inspectionc......................................................
Material handlingd ..........................................
Engineeringe ...................................................
Total ................................................................
$105.00
48.00
110.25
.43
31.50
82.03
45.25
$422.46
Product
T
Product
W
$157.50
36.00
122.50
.32
46.20
120.75
6.90
$490.17
$ 52.50
24.00
238.88
1.89
157.50
39.38
142.21
$656.36
aMachinery:
Product G: ($3,675,000  24%)
Product T:
($3,675,000  50%)
Product W: ($3,675,000  26%)
bMachine setup:
Product G: ($15,750  22%)
Product T:
($15,750  30%)
Product W: ($15,750  48%)
cInspection:
Product G: ($1,575,000  16%)
Product T:
($1,575,000  44%)
Product W: ($1,575,000  40%)
dMaterial handling:
Product G: ($2,625,000  25%)
Product T:
($2,625,000  69%)
Product W: ($2,625,000  6%)
eEngineering:
Product G: ($1,034,250  35%)
Product T:
($1,034,250  10%)
Product W: ($1,034,250  55%)
McGraw-Hill/Irwin
Managerial Accounting, 8/e



8,000 units =
15,000 units =
4,000 units =
$110.25
$122.50
$238.88



8,000 units =
15,000 units =
4,000 units =
$ .43
$ .32
$ 1.89



8,000 units =
15,000 units =
4,000 units =
$ 31.50
$ 46.20
$157.50



8,000 units =
15,000 units =
4,000 units =
$ 82.03
$120.75
$ 39.38



8,000 units =
15,000 units =
4,000 units =
$ 45.25
$ 6.90
$142.21
© 2009 The McGraw-Hill Companies, Inc.
5-28
PROBLEM 5-60 (CONTINUED)
6.
Comparison of reported product costs, new target prices, and actual selling prices:
Product
G
Reported product costs:
Traditional, volume-based costing system
Activity-based costing system
Target price based on new product costs
(150%new product cost)
Current actual selling price
Product
T
Product
W
$573.00
422.46
$508.50
490.17
$286.50
656.36
633.69
639.00
735.26
762.75
984.54
600.00
7.
THE ELECTRONIC VERSION OF THE SOLUTIONS MANUAL “BUILD A
SPREADSHEET SOLUTIONS” IS AVAILABLE ON YOUR INSTRUCTORS CD AND ON THE
HILTON, 8E WEBSITE: WWW.MHHE.COM/HILTON8E.
PROBLEM 5-61 (20 MINUTES)
MEMORANDUM
Date:
Today
To:
President, Gigabyte, Inc.
From:
I.M. Student
Subject:
Gigabyte's competitive position
Gigabyte's product-costing system has been providing misleading product cost
information. Our traditional, volume-based costing system overcosted gismos and
thingamajigs, but it substantially undercosted whatchamacallits. As a result Gigabyte has
been overpricing gismos and thingamajigs and underpricing whatchamacallits. The
company has been losing money on every sale in the product W market. Our competitors
have taken advantage of our mispricing by moving aggressively into the gismo market and
abandoning the whatchamacallit market to Gigabyte. As a result, our profitability has
suffered.
I recommend the following courses of action:
1.
Implement the new activity-based costing system and revise its database frequently.
2.
Lower the target price of gismos to $639, the current actual selling price. This price is
slightly over our usual 50 percent markup over product cost.
3.
Consider lowering the price of thingamajigs to $736 in order to increase demand. The
lower price still yields Gigabyte a 50 percent markup over product cost.
4.
Raise the price of whatchamacallits to $985. If the product does not sell at that price,
consider discontinuing the product line.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc.
5-29
McGraw-Hill/Irwin
Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc.
5-30
PROBLEM 5-65 (45 MINUTES)
1.
Two dimensional ABC:
Cost Assignment View
RESOURCE COSTS
Assignment of resource costs
to activity cost pools
associated with
significant activities
Process View
Activity analysis
1
7
11
2
8
3
9
12
13
ROOT
CAUSES
(see req. (3)
for examples)
4
10
5
14
15
16
6
ACTIVITY
TRIGGERS
Activity evaluation
ACTIVITIES
PERFORMANCE
MEASURES
(see req. (4) for examples)
(see req. (2) for
examples)
Assignment of activity
costs to cost objects
using second-stage
cost drivers
COST OBJECTS
(Product lines: cooking
utensils, tableware,
flatware)
McGraw-Hill/Irwin
Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc.
5-31
PROBLEM 5-65 (CONTINUED)
2.
Triggers for selected activities:
Activity
Number
Trigger
(2)
Realization by purchasing personnel that they do not fully understand the
part specifications
3.
(9)
Realization by purchasing personnel that the ordered part will be (or may
be) late in arriving
(11)
Receipt of order
(12)
Discovery during inspection that parts do not meet specifications
(13)
Discovery that parts do not satisfy intended purpose
Possible root causes:
Activity
Number
Possible Root Causes*
(2)
Unclear specifications
Incomplete specifications
Clear, but apparently wrong, specifications
Undertrained purchasing personnel
(9)
Vendor delay
Delay in placing order
Failure by purchasing personnel to make deadline clear
(11)
Use of vendor that has not been fully certified as a reliable supplier
Critical importance of parts
(12)
Misspecification of parts
Error by purchasing personnel in placing order
Vendor error
Inspector error
(13)
Misspecification of parts
Incomplete specifications
Poor product design
Error by purchasing personnel in placing order
Vendor error
*This list is not necessarily complete. Other root causes may exist.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc.
5-32
PROBLEM 5-65 (CONTINUED)
4.
Suggested performance measures:
Activity
Performance
Number
Measures
(5)
Average price paid
(6)
Number of vendors
Number of vendors that are precertified as dependable
(10)
Percentage of orders received on time
Average delay for delinquent orders
(12)
Number of orders returned
Percentage of orders returned
(16)
Average dollar value tied up in parts inventory
PROBLEM 5-66 (40 MINUTES)
1.
Customer-profitability analysis:
Sales revenue ......................................................................
Cost of goods sold ..............................................................
Gross margin .......................................................................
Selling and administrative costs:
General selling costs ....................................................
General administrative costs .......................................
Customer-related costs:
Sales activity ...........................................................
Order taking .............................................................
Special handling ......................................................
Special shipping ......................................................
Total selling and administrative costs...............................
Operating income ................................................................
McGraw-Hill/Irwin
Managerial Accounting, 8/e
Caltex
Computer
Trace
Telecom
$380,000
160,000
$220,000
$247,600
124,000
$123,600
$ 48,000
38,000
$ 36,000
32,000
16,000
6,000
80,000
18,000
$206,000
$ 14,000
12,000
8,000
60,000
20,000
$168,000
$ (44,400)
© 2009 The McGraw-Hill Companies, Inc.
5-33
PROBLEM 5-66 (CONTINUED)
2.
The electronic version of the Solutions Manual “BUILD
A SPREADSHEET SOLUTIONS” is available on your
Instructors CD and on the Hilton, 8e website:
www.mhhe.com/hilton8e.
PROBLEM 5-67 (45 MINUTES)
1.
Customer-profitability profile (supporting details in the table following the profile):
Cumulative Operating Income as a
Percentage of Total Operating Income
120%
110%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
Customers*
0%
1
2
3
4
5
6
7
8
*Customers ranked by operating income.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc.
5-34
PROBLEM 5-67 (CONTINUED)
Supporting details for customer-profitability profile:
Customer
Numbera
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Customer
Network-All, Inc.
Golden Gate Service Associates
Graydon Computer Company
Mid-State Computing Company
Caltex Computerb
The California Group
Tele-Install, Inc.
Trace Telecomc
Operating
Income
Cumulative
Operating
Income
$186,000
142,000
120,000
84,000
14,000
12,000
(36,000)
(44,400)
$186,000
328,000
448,000
532,000
546,000
558,000
522,000
477,600
Cumulative
Operating
Income as a
Percentage of
Total
Operating
Income
39%
69%
94%
111%
114%
117%
109%
100%
aCustomer
numbers are ranked by operating income.
solution to preceding problem.
cFrom solution to preceding problem.
bFrom
2.
Memorandum
Date:
Today
To:
I. Sellit, Vice President for Marketing
From:
I. M. Student
Subject:
Customer-profitability profile
The attached customer-profitability profile shows that two of our customer relationships
are unprofitable (Tele-Install, Inc. and Trace Telecom). As the profile shows, over half of
our operating income is generated by our two most profitable customer relationships,
and 94 percent of our operating profit is generated by our three most profitable
customers.
An activity-based costing analysis of customer-related costs provided the data for the
customer-profitability analysis portrayed in the profile.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc.
5-35
SOLUTIONS TO CASES
CASE 5-68 (45 MINUTES)
1.
Activity-based costing (ABC) differs from traditional costing in that it focuses on activities
that consume resources as the fundamental cost drivers. ABC is a two-stage cost
assignment process focused on causality and the determination of cost drivers. It usually
uses several different activities to assign costs to products or services. Therefore, it is
more detailed and more accurate than traditional costing. It also helps managers
distinguish between value added and non-value added activities.
2.
Calculations of total activity cost pools and pool rates:
Material handling ..... ($113,208  1.06)  [(5 parts  5,000 units) + (10 parts  5,000 units)]
= $120,000*  (25,000 parts + 50,000 parts)
= $120,000  75,000 parts = $1.60 per part
*Rounded
Inspection................. ($235,850  1.06)  (5,000 hours + 7,500 hours)
= $250,000*  12,500 hours = $20 per inspection hour
*Rounded
Machining ................. ($849,056  1.06)  (15,000 hours + 30,000 hours)
= $900,000*  45,000 hours = $20 per machine hour
*Rounded
Assembly.................. ($433,962  1.06)  (6,000 hours + 5,500 hours)
= $460,000*  11,500 hours = $40 per assembly hour
*Rounded
McGraw-Hill/Irwin
Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc.
5-36
CASE 5-68 (CONTINUED)
3.
JY-63
20x4
Cost
Data
JY-63
Estimated
20x5
Product
Cost
Direct material:
No cost increase ........................
Direct labor:
Direct labor
$370,370
 1.08 cost increase* ..............
Material handling:
Number of parts
5
 units produced ....................
 5,000
25,000
 $1.60 per unit .......................
Inspection:
Inspection hours
5,000
 $20 per hour .........................
Machining:
Machining activity in
15,000
hours
 $20 per hour .........................
Assembly:
Assembly activity in
6,000
hours
 $40 per hour .........................
Total cost .....................................
RX-67
20x4
Cost
Data
$2,000,000
RX-67
Estimated
20x5
Product
Cost
$3,500,000
$185,186
400,000
200,000
10
 5,000
50,000
40,000
80,000
7,500
100,000
150,000
30,000
300,000
600,000
5,500
240,000
220,000
$3,080,000
$4,750,000
*$400,000 and $200,000 are both rounded.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc.
5-37
CASE 5-68 (CONTINUED)
4.
CINCINNATI CYCLE COMPANY
BUDGETED STATEMENT OF GROSS MARGIN FOR 20X5
Sales revenue .................................................
Cost of goods manufactured and sold:
Beginning finished-goods inventory.............
Add: Direct material .....................................
Direct labor ..........................................
Material handling ................................
Inspection ............................................
Machining ............................................
Assembly .............................................
Cost of goods available for sale ....................
Less: Ending finished-goods inventory* ...
Cost of goods sold .........................................
Gross margin ..................................................
JY-63
$3,621,000
RX-67
$4,459,000
Total
$8,080,000
$ 480,000
2,000,000
400,000
40,000
100,000
300,000
240,000
$3,560,000
431,200
$3,128,800
$ 492,200
$ 600,000
3,500,000
200,000
80,000
150,000
600,000
220,000
$5,350,000
665,000
$4,685,000
$ (226,000)
$1,080,000
5,500,000
600,000
120,000
250,000
900,000
460,000
$8,910,000
1,096,200
$7,813,800
$ 266,200
*Ending finished-goods inventory = (total product cost  units produced)  ending
inventory in units:
JY-63: ($3,080,000  5,000 units)  700 units = $431,200
RX-67: ($4,750,000  5,000 units)  700 units = $665,000
McGraw-Hill/Irwin
Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc.
5-38
CASE 5-69 (60 MINUTES)
1.
Product costs based on traditional, volumebased costing system ...............................
× 110% ..............................................................
Target price ......................................................
2.
Regular
Model
Advanced
Model
Deluxe
Model
$210.00
 110%
$231.00
$430.00
 110%
$473.00
$464.00
 110%
$510.40
Advanced
Model
$ 50.00
40.00
416.00
Deluxe
Model
$ 84.00
40.00
153.60
Product costs based on activity-based costing system:
Direct material .................................................
Direct labor ......................................................
Machinery depreciation and maintenancea ...
Engineering, inspection and
repair of defectsb .......................................
Purchasing, receiving, shipping, and
material handlingc ......................................
Factory depreciation, taxes, insurance,
and miscellaneous overhead costsd ........
Total ..................................................................
Regular
Model
$ 20.00
20.00
62.40
34.08
87.00
68.15
30.55
104.00
58.50
24.99
$192.02
178.50
$875.50
51.17
$455.42
aPool
I:
Depreciation, machinery ..............................................................
Maintenance, machinery ..............................................................
Total ...............................................................................................
Regular:
Advanced:
Deluxe:
McGraw-Hill/Irwin
Managerial Accounting, 8/e
($3,200,00039%)  20,000 =
($3,200,00013%)  1,000 =
($3,200,00048%)  10,000 =
$2,960,000
240,000
$3,200,000
$ 62.40
$416.00
$153.60
© 2009 The McGraw-Hill Companies, Inc.
5-39
CASE 5-69 (CONTINUED)
bPool
II:
Engineering ...................................................................................
Inspection and repair of defects ..................................................
Total ...............................................................................................
Regular:
Advanced:
Deluxe:
($1,450,000  47%)  20,000 =
($1,450,000  6%)  1,000 =
($1,450,000  47%)  10,000 =
$ 700,000
750,000
$1,450,000
$ 34.08
$ 87.00
$ 68.15
cPool
III:
Purchasing, receiving, and shipping ..........................................
Material handling ..........................................................................
Total ...............................................................................................
Regular:
Advanced:
Deluxe:
($1,300,000  47%)  20,000 =
($1,300,000  8%)  1,000 =
($1,300,000  45%)  10,000 =
$ 500,000
800,000
$1,300,000
$ 30.55
$104.00
$ 58.50
dPool
IV:
Depreciation, taxes, and insurance for factory ..........................
Miscellaneous manufacturing overhead .....................................
Total ...............................................................................................
Regular:
Advanced:
Deluxe:
($1,190,000  42%)
($1,190,000  15%)
($1,190,000  43%)



20,000 =
1,000 =
10,000 =
$ 600,000
590,000
$1,190,000
$ 24.99
$178.50
$51.17
3.
Regular
Model
Product costs based on activity-based
costing system ..................................................
× 110% .......................................................................
New target price .......................................................
$192.02
 110%
$211.22
Advanced
Model
$875.50
 110%
$963.05
Deluxe
Model
$455.42
 110%
$500.96
The new target price of the regular model, $211.22, is lower than the current actual
selling price, $220.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc.
5-40
CASE 5-69 (CONTINUED)
4.
MEMORANDUM
Date:
Today
To:
President Madison Electric Pump Corporation
From:
I.M. Student
Subject:
Product costing
Based on the cost data from our traditional, volume-based product-costing system,
our regular model is not very profitable. Its reported actual contribution margin is only
$10 ($220 – $210). However, the validity of this conclusion depends on the accuracy of
the product costs reported by our product-costing system. Our competitors are
selling motors like our standard model for $212. This price suggests that their product
cost is substantially below our previously reported cost of $210.
Our new, activity-based costing system reveals serious product cost
distortions stemming from our old costing system. The new costing system shows
that the regular model costs only $192.02, which implies a target price of $211.22. This
price is lower than our current actual selling price and roughly consistent with the
price our competitors are charging.
In contrast, our new product-costing system reveals that the advanced model's
product cost is $875.50 instead of the previously reported cost of $430. The new
product cost suggests a target price of $963.05 for the advanced model, rather than
$473, which was our previous target price for the advanced model.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc.
5-41
CASE 5-69 (CONTINUED)
5.
The company should adopt and maintain the activity-based costing system. The price
of the regular model should be lowered to the $212. Lowering the price should enable
the firm to regain its competitive position in the market for the regular model. Further
price cuts should be considered if marketing studies indicate such a move will
increase demand.
The price of the advanced model should be set near the target price of $963.05.
If the advanced model does not sell at this price, management should consider
discontinuing the product line. Input from the marketing staff should be sought before
such an action is taken. An important consideration is the extent to which sales in the
regular model and deluxe model markets depend on the firm's offering a complete
product line.
A slight price reduction should be considered for the deluxe model (from
$510.40 down to $500.96). However, the product cost distortion from the old costing
system did not affect this model as seriously as it did the other two.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc.
5-42