Deck 7: Assessing and Improving Product Profitability

Question 1

A company is considering the development of a new product. The lower it is able to set the product price, the higher the product's value proposition will be.

Answer 1

True

Question 2

The difference between target price and estimated product cost is referred to as the cost gap.

Answer 2

False

Question 3

The attainment phase of target costing focuses on eliminating the cost gap.

Answer 3

True

Question 4

Green Valley Coffee Company has designed a new coffee maker for its existing product line. The company estimates that the unit cost to produce the machine will be $40. This is within its target cost of $48. A pilot production run, however, results in an actual unit cost of $46. Green Valley Coffee faces a cost gap of $6.

Question 5

If standards for product costs are set too tight, they may lead to dysfunctional behavior as workers take shortcuts to meet those standards.

Question 6

The material price variance is computed by weighting the difference between the actual price of a raw material and its standard price by the quantity of material allowed for the actual output achieved.

Question 7

A production scheduling error that results in the unanticipated use of overtime labor will result in an unfavorable labor rate variance.

Question 8

A continuous improvement program will focus only on financial measures of production performance.

Question 9

External product quality failures will typically prove more costly than internal product quality failures.

Question 10

Scrapped units and rework are typical costs of an internal product quality failure.

Question 11

The radar chart is the most useful device for highlighting which of several product or process failures is the most significant problem facing the firm.

Question 12

The value of cost-volume-profit analysis is limited because it is incapable of adequately incorporating nonfinancial issues into its calculations.

Question 13

A process change will reduce unit variable cost while leaving the product price and total fixed cost unchanged. This will necessarily reduce the product's breakeven volume.

Question 14

A poorly performing new product will harm the entity by reducing the sales volumes of complementary products.

Question 15

Harrier Company is considering an opportunity to outsource the production of a compressor used in its residential air conditioning units. If it does so, a production supervisor will be deployed elsewhere in the company. The supervisor's salary is an example of a relevant cost.

Question 16

From the perspective of the customer, the difference between the perceived worth of a product and its selling price is referred to as the product's:

A) Gross profit margin.
B) Contribution margin.
C) Value proposition.
D) Operating income.

Question 17

The attainment phase of target costing focuses on:

A) Eliminating the cost gap.
B) Establishing the target price.
C) Developing a target cost based on expected profit.
D) Pareto analysis of product failures.

Question 18

The cost gap is the difference between a product's:

A) Value proposition and selling price.
B) Target cost and estimated cost.
C) Standard cost and actual cost.
D) Target price and expected profit.

Question 19

Of the following types of costs, which is not a candidate for improvement during the attainment phase of target costing?

A) Material costs.
B) Conversion costs.
C) Activity costs.
D) Preproduction costs.

Question 20

The internal process focused on bringing together all of the parts needed to produce the product is termed:

A) Kit materials.
B) Conversion.
C) The product establishment phase.
D) The attainment phase.

Question 21

The standards used to assess performance during an initial product launch will be typically based on:

A) Actual manufacturing conditions.
B) Studies conducted by design engineers.
C) Internal benchmarks.
D) Regression models.

Question 22

"Tight but attainable" standards:

A) Are developed principally from engineering estimates.
B) Require experience in actually manufacturing the product.
C) Avoid both waste and dysfunctional shortcuts by workers.
D) Only rarely produce cost variances.

Question 23

Northern Organics, Inc., produces a brand of garden fertilizer that achieved its target cost several years ago. The company periodically reevaluates the raw material composition of the product as well as all steps in its manufacturing process and has reduced the actual cost of the product several times since its introduction. Northern Organics, Inc., has successfully engaged in:

A) Continuous improvement.
B) Target costing.
C) Total quality management.
D) Cost-volume-profit analysis.

Question 24

Of the following performance measures, which would be regarded as financial?

A) Rate of on-time delivery.
B) Units reworked.
C) Material price variance.
D) Defective units returned.

Question 25

The difference between the actual quantity of a raw material used and the standard quantity allowed, weighted by the standard price measures the:

A) Material usage variance.
B) Material price variance.
C) Target cost of the raw material.
D) Engineering standard for the raw material.

Question 26

Product cost variance analysis will help management understand some of the reasons that:

A) Actual product cost differs from the estimate established during the attainment phase.
B) Target cost hasn't yet been achieved.
C) The product's target price is too low.
D) Established engineering standards are too tight.

Question 27

One of Bella Corporation's chief products is a line of high-quality exterior wooden doors for residential structures. A key step in the manufacturing process consists of applying a protective lacquer finish to the completed door. Established standards allow a laborer five minutes to apply the finish to each door. The labor assigned to this task has a standard wage rate of $24 per hour. During a recent eight-hour shift, 90 doors received the application of the protective finish at a total labor cost of $192.

A) Bella experienced an unfavorable labor rate variance of $12.
B) Bella experienced a favorable labor efficiency variance of $12.
C) Bella experienced an unfavorable labor efficiency variance of $12.
D) Bella experienced a favorable labor rate variance of $12.

Question 28

Squishy Burger Company has developed a number of nonfinancial measures to assess customer reaction to its new Tower of Yummy sandwich. Which of the following tools would prove most useful in assessing customer acceptance of the new sandwich relative to the company's established products?

A) Product cost variance analysis.
B) Incremental analysis.
C) Pareto chart.
D) Radar chart.

Question 29

In recent years, Volkswagen, Inc., suffered significant financial losses because many of its automobiles were unable to achieve promised fuel economy and satisfy mandated emissions. The cost suffered by Volkswagen best illustrates:

A) Internal product quality failure.
B) Inspection costs.
C) External product quality failure.
D) Product design failure.

Question 30

In response to an unexpected increase in the number of defective units detected prior to packaging for shipment, Décor Cabinet Company has recently been forced to substantially increase the number of completed units subjected to a quality control inspection. The increased cost of inspection best illustrates:

A) Internal product quality failure.
B) External product quality failure.
C) Unfavorable product cost variances.
D) A failure to reach target cost during the establishment phase.

Question 31

When evaluating the cost of quality in an organization, which of the following would be considered an internal failure cost?

A) The cost to rework defective units.
B) The cost to inspect units produced.
C) The warranty repair costs.
D) Product testing.

Question 32

External failure costs include all of the following costs except those related to:

A) Lost sales and lost customers.
B) Warranty obligations.
C) Product liability suits.
D) Product field testing.

Question 33

Quest Tires, Inc., asks customers to rate its new Ice Pick All Weather tire on four metrics: durability, handling, noise, and traction. Customers rate the tires on a scale of 0 to 5. Quest compares these customer reactions to similar evidence on its long-established Snow Chaser tire. The largest discrepancy between the two tires is on the durability metric. This difference would be most evident on a:

A) Pareto chart.
B) Radar chart.
C) Line graph.
D) Management dashboard.

Question 34

The use of cost-volume-profit analysis to evaluate the impact of tactical changes is limited by the assumption that:

A) All costs are purely fixed or variable.
B) The company produces a single product.
C) Revenue and cost functions are linear.
D) Production volumes are confined to the relevant range.

Question 35

Phillips & Company produces educational software. Its unit cost structure, based upon an anticipated production volume of 150,000 units, is as follows.
The marketing department has estimated sales for the coming year at 175,000 units, which is within the relevant range of Phillips's cost structure. Phillips's breakeven volume (in units) and anticipated operating income for the coming year would amount to:

A) 82,500 units and $7,875,000 of operating income.
B) 82,500 units and $9,250,000 of operating income.
C) 96,250 units and $3,543,750 of operating income.
D) 96,250 units and $7,875,000 of operating income.

Question 36

Phillips & Company produces educational software. Its unit cost structure, based upon an anticipated production volume of 150,000 units, is as follows.
The marketing department has estimated sales for the coming year at 175,000 units, which is within the relevant range of Phillips's cost structure. Phillips has an opportunity to adopt a new structure for the coding of its software that will increase variable costs per unit to $66.25, but at the same time allow the company to reduce unit fixed costs to $50. These changes to the cost structure would have no impact on selling price or anticipated sales. If the changes are made, the new breakeven point and anticipated operating income for the coming year amount to:

A) 80,000 units and $8,906,250 of operating income.
B) 80,000 units and $7,656,250 of operating income.
C) 96,250 units and $8,906,250 of operating income.
D) 96,250 units and $7,656,250 of operating income.

Question 37

Steps undertaken to enhance the quality of one of a multiproduct firm's products may yield benefits in the form of:

A) Reduced fixed costs.
B) Increased rates of internal product quality failures of related products.
C) Increased sales volumes of complementary products.
D) Increased target prices.

Question 38

When analyzing the impact of tactical changes, incremental analysis improves on cost-volume-profit analysis by:

A) Taking an entity view as opposed to a product view.
B) Expanding the relevant range.
C) Allowing for nonlinearities in the cost functions.
D) Adopting a total quality management focus.

Question 39

Refrigerator Company manufactures ice makers for installation in refrigerators. The costs per unit, for 20,000 units of ice makers, are as follows.
Cool Compartments Inc. has offered to sell 20,000 ice makers to Refrigerator Company for $28 per unit. If Refrigerator accepts Cool's offer, the plant would be idled and fixed overhead amounting to $6 per unit could be eliminated. The total relevant costs associated with the manufacture of ice makers amount to

A) $480,000.
B) $560,000.
C) $600,000.
D) $680,000.

Question 40

Johnson Company manufactures a variety of shoes, and has received a special onetime-only order directly from a wholesaler. Johnson has sufficient idle capacity to accept the special order to manufacture 15,000 pairs of sneakers at a price of $7.50 per pair. Johnson's normal selling price is $11.50 per pair of sneakers. Variable manufacturing costs are $5 per pair and fixed manufacturing costs are $3 a pair. Johnson's variable selling expense for its normal line of sneakers is $1 per pair. What would the effect on Johnson's operating income be if the company accepted the special order?

A) Decrease by $60,000.
B) Increase by $22,500.
C) Increase by $37,500.
D) Increase by $52,500.

Question 41

Wild Birds in the Garden, Inc., produces a full line of bird feeders and other accessory items for backyard bird enthusiasts. The company has completed the design of a new baffle to prevent squirrels from raiding its bird feeders. The new baffle features innovative graphite-based coating that makes the surface too slippery for a squirrel to grasp. Because of this feature, the company estimates that the baffle can be sold at a premium price of $15 per unit. The design team assembled the following information.
The company desires a 40% margin to cover overhead, other costs, and a return on capital.
Required:
a. What is the company's target cost?
b. What is the current estimated cost to make the baffle?
c. What is the cost gap?
d. The design team has suggested that the baffle could be produced in a smaller size. This would reduce the quantity of sheet metal needed to 2.5 square feet per unit. The amount of graphite used could also be reduced to 0.5 ounces. These changes would make the baffle slightly less resistant to squirrels and too small to fit the largest of the company's bird feeders. If these changes are implemented, will the baffle meet its target cost? How do you think the suggested changes would affect the baffle's value proposition?

Question 42

Wild Birds in the Garden, Inc., has gone ahead and launched its new baffle for bird feeders. The company has established the following standards for powdered graphite, one of the key raw materials required by the product: standard quantity allowed per baffle: 0.5 ounces; standard price: $2 per ounce. The first production run of 500 baffles consumed 265 ounces of powdered graphite that was purchased at a total cost of $556.50.
Required:
Compute the material price variance and the material usage variance. How have these variances affected the company's original estimate of the cost to produce the baffle?

Question 43

Orion Tires, Inc., has recently introduced a second all-weather tire into its product line called the Ice Crusher. The company has asked customers to rate the tire on a scale of 0 to 5 (with 5 being most satisfactory) on four attributes: durability; handling; road noise; and traction. The results of the survey for the Ice Crusher and existing customer survey data for Orion's other all-weather tire, the Snow Plow, are given in the table below:
Required:
a. Create a radar chart for each of the tires.
b. How do the tires compare? What attribute of the Ice Crusher would give Orion the greatest concern?

Question 44

Following some process redesign, Wild Birds in the Garden, Inc, has concluded that it can sell its new baffle for bird feeders at $15 per unit. Variable production costs will be $8.25 per unit. In addition, the company will incur total fixed costs associated with production of the baffle of $300,000 annually. Variable selling costs will add another $2.75 per unit.
Required:
a. Compute the breakeven volume of annual sales for the new baffle.
b. A discount chain, Dollar Lieutenant, approaches Wild Birds in the Garden with an offer to purchase 20,000 of the baffles at a reduced price of $12.50 per unit. These baffles could be produced in different colors to distinguish them from those that will be sold exclusively in Wild Birds in the Garden's franchised retail stores. Wild Birds in the Garden has sufficient capacity to fill the special order with no increase in fixed costs. It would also incur only $1.00 per unit of variable selling costs on these 20,000 units. Using incremental analysis, demonstrate whether or not it makes sense for Wild Birds in the Garden to accept this special order.