Quiz 8: Cost Allocation: Practices
Business
Q 1Q 1
Carlos Sanguine Winery
Carlos Sanguine, Inc., makes premium wines and table wines. Grapes are crushed and the free-flowing juice and the first-processing juice are made into premium wines. The second- and third-processing juices are made into table wines.
Table 1 summarizes operations for the year, and Table 2 breaks down manufacturing overhead expenses into general winery costs and production facilities costs.
Based on Tables 1 and 2, the accounting department prepared the report in Table 3.
Management is concerned that the table wines have such a low margin. Some of the managers urge that these lines be dropped. Competition keeps the price down to $7 per case, which causes some managers to question how the competition could afford to sell the wine at this price.
Before making a final decision, top management asked for an analysis of the fixed and variable costs by product line and their break-even points. When management saw Table 4, the president
Note: A greater quantity of juice is required per case of premium wine than per case of table wine because there is more shrinkage in the premium wines.
†Each product has its own selling and distribution organization. Two-thirds of S D expenditures vary with cases produced; the remainder of the expenditures do not vary with output.
* General winery costs do not vary with the number of cases or the number of product lines and are allocated based on cases produced.
†Premium and table wines have separate production facilities. One-fourth of each of their production facilities costs varies with cases produced. The remainder are fixed costs previously incurred to provide the production capacity.
remarked, "Well, this is the final nail in the coffin. We'd have to almost triple our sales of table wines just to break even. But we don't have that kind of capacity. We'd have to buy new tanks, thereby driving up our fixed costs and break-even points. This looks like a vicious circle. By next month, I want a detailed set of plans on what it'll cost us to shut down our table wines." Table 5 summarizes the shutdown effects.
Based on the facts presented in the case, what should management do?
Free
Essay
The basic error that management is making in this case is allocating a joint cost, the grape costs, and then using these allocated numbers to assess product line profitability. Any decisions based on allocated joint costs are at risk of being wrong because the net realizable value (NRV) method for allocating grape costs is not being used.Tables 1 and 2 both contain grape costs allocated by gallons, not NRV. Therefore, these analyses do not measure the incremental contribution to cash flows if a product is dropped. If table wines are dropped, grape costs of $250,000 ($3.57/case) are not saved. The firm still is paying $1,900,000 for grapes. All that will happen is that the $250,000 that is being allocated to the table wines will now be absorbed by the remaining premium wines. Or, if this juice is sold to the bulk purchasers, then $100,000 ($250,000 - $150,000) will be absorbed by the premium wines.
To assess the table wines' product line profitability, Exhibit A displays the incremental cash flows contributed by the table wines.
1 This is the worst-case assumption in that all of the costs are assumed to be incurred to produce table wines.
2 General winery costs are not incremental with respect to table wines. Producing table wines generates incremental costs equal to the variable cost of the production facilities.
From Exhibit A we see that the table wines are contributing positive cash flows. In fact, the cash flows of $267,425 exceed the amount by which the firm can sell the unprocessed juice ($150,000). The only question is whether these incremental cash flows (the $117,425 = 267,425 - 150,000) justify not selling the facilities. Exhibit B compares these two alternatives.
If we continue to produce, we forgo the $350,000, but we gain an additional $117,425 per year of cash flows. It would take a (real) before-tax cost of capital in excess of 30 percent to make the shutdown the better of the two decisions.
Therefore, the best alternative is to keep producing. The president erroneously believes that he can save the grape costs if they shut down. Also, he believes that some of the fixed manufacturing overhead (in particular the winery costs) will be saved. But both of these are allocated costs.
One way to avoid the misleading impression that the table wines are unprofitable is to allocate grape and common winery costs based on net realizable value (relative profitability) of the two products. This method does not distort the products' relative profitability. Exhibit C computes product profitability using net realizable value to allocate grape and manufacturing overhead costs.
1 $390,380 = 91.1837% × $428,125
2 $37,745 = 8.8163% × $428,125, where $428,125 = $487,500-$59,375 and $59,373 = 25% × $237,500 since 25% of Production Facility costs are variable (see Table 2).
Using net realizable value to allocate grape and manufacturing overhead costs produces a positive profit for the table wine product line. Notice that the total profits of premium and table wines of $692,500 is the same as that reported in Table 1 ($750,000 less loss of $57,500).
Q 2Q 2
Swedish Hospital
Swedish Hospital uses a step-down method to allocate 25 indirect service department costs (information technology, laundry, security, records, food service, etc.) to the six direct patient care units (surgery, maternity, psychiatry, etc.). The Food Service (FS) department (patient and staff dining) currently is the third service department to be allocated in the step-down methodology. Swedish is revamping its step-down methodology and is considering moving FS from its 3rd place position to the 23rd position.
Required:
a. FS costs are allocated based on the number of meals served. Does the FS allocated cost per meal served increase or decrease if FS moves from its 3rd place position to the 23rd position in the step-down methodology? Also, describe exactly what causes the allocated cost per meal to increase or decrease.
b. Describe the issues that Swedish management should consider before moving FS from its 3rd place position to the 23rd position in the step-down methodology.
Free
Essay
Step-down method: Under this method, first the management chooses a service department and allocates all its costs to the remaining service departments and operating divisions. Then it continues the process until all the service department costs are allocated.a) Effect of change in position for allocation: The sequence of the service department can affect the management's decision making, as the last service department in the sequence will have a higher unit cost of service. When the service department changes the sequence, the numerator increases by the costs of allocate service department and the other service departments are excluded from the denominator. What affects the allocated cost per meal? The cost gets affected basing on the method of allocation used. The allocation method affects the decisions of the departments to add or quit a product. Therefore, the method used for allocation plays a vital role in management decisions. b) Issues for considering moving the position in step down methodology: On inclusion of fixed costs, the total costs will not proportionately reduce on the fall of usage. Therefore, if the service department contains significant amounts of fixed costs, it will lead to significant problems. Result in cost per units may vary depending on different sequences. Moreover, the step-down method ignores the fact that the department which is allocated earlier may use the service departments which are later in the sequence.Therefore, the earlier departments are not allocated the costs of service departments in the later sequence though it uses the service department.
Q 3Q 3
Wyatt Oil
Wyatt Oil owns a major oil refinery in Channelview, Texas. The refinery processes crude oil into valuable outputs in a two-stage process. First, it distills a barrel of crude oil at a variable cost of $2 per barrel into two types of outputs: light distillates (such as gasoline, jet fuel, diesel fuel, and kerosene) and heavy distillates. The light distillates are sold for $48 per barrel. The heavy distillates can either be sold for $30 per barrel or fed into a catalytic cracking unit ("cat cracker") at a variable cost of $3 per barrel to be converted into light distillates and sold, for $48 per barrel. The diagram in Figure 1 illustrates the refining process.
Wyatt's Channelview refinery can distill 60 million barrels of oil per year and feed 30 million barrels of heavy distillate a year into the cat cracker. It can process either light, sweet crude from Texas (such as West Texas Intermediate) or heavy, sour crude from the Middle East (such as Kuwait Export), depending on the market prices of the two types of crude. More valuable products are distilled from a barrel of light, sweet crude than from a barrel of heavy, sour crude (see Figure 2). Light, sweet crude currently costs $34 per barrel and heavy, sour crude costs $30; however, the price
differential is volatile, as noted in Figure 3. The output from 60 million barrels of West Texas Intermediate and 60 million barrels of Kuwait Export is shown in Table 1.
The fixed and variable costs and capacities associated with distilling crude and cracking the heavy distillates are shown in Table 2.
Required:
a. Allocate the projected $420 million accounting income of the Channelview refinery among its three activities-light distillates, processed heavy distillates, and sold heavy distillates-by allocating joint costs on the basis of (1) physical volume and (2) net realizable value. Compare the ratio of accounting profit to net realizable value of the three activities under both methods.
b. Did Quillen make the right decision to switch from West Texas Intermediate to Kuwait Export when the price differential reached $3.50 per barrel? Assuming there are no switching costs, find the optimal decision rule as a function of the price differential.
c. Would your decision rule be different if you were to expand the cracker capacity to 40 million barrels? Find the optimal switching rule if the refinery can crack 40 million barrels of heavy distillates each year.
d. Assume the price differential between West Texas Intermediate crude and Kuwait Export crude remains the same at $4 per barrel. Should Quillen expand the refinery's cat cracking capacity?
e. Now consider the possibility of changes in the price differential. Suppose that this year's price differential is $4, but next year's price differential could be anywhere between 75 percent and 125 percent of the current year differential (equally likely, so next year's price differential can be thought of as a random variable uniformly distributed on the interval [$3, $5]). Each succeeding year, the price differential follows the same pattern: between 75 percent and 125 percent of the prior year price differential. Should Quillen expand capacity? Why or why not?
Free
Essay
Net relative sales value method of apportioning the joint cost:
Under this method, the total joint cost is divided by the total sales value of the products obtained from the process and then multiplied by their relative individual sales value of the product. On multiplication, the apportioned cost of the products will be obtained.a.
Prepare the statement showing allocation of projected income of $420 million accounting income using physical volume method:
The result of the above excel is shown below:
Statement showing allocation of projected income of $420 million accounting income to the business of light distillates, processed heavy distillates and sold using net realizable value method:
The result of the above excel is shown below:
Prepare the statement showing ratio of accounting profits to net realizable value under both methods using the MS Excel sheet as shown below:
The result of the above excel is shown below:
b.
Prepare the statement showing projected accounting income if the crude oil is purchased from west T intermediate using the MS Excel sheet as shown below:
The result of the above excel is shown below:
Mr. Q has made the right decision to switch from West T intermediate to K Exports when the price differential between the two has reached $3.5. This is because the net accounting income of refinery is $360 million if raw crude oil is purchased from west T intermediate which is lower than the existed projected accounting profits of $420 million.
The optimal decision rule of choosing west T or K export as a function of price differential is when the price differential between the two reaches $3 per barrel. If the difference between the price of light crude and heavy crude is less than $3 per barrel, then purchasing crude oil from west T is better. If the difference is exactly $3 per barrel, then the two options are indifferent.
If the difference between the prices between the two increases from $3 per barrel, then purchasing crude oil from K export is preferable. Then calculate the break even differential rate using the equation as shown below.
Rearrange the above equation to find the value of P as shown below:
The break even differential is
.
c.
The decision would be different as against Mr. H. It would be profitable to expand the cracker capacity to 40 million barrels. This is because, after expanding the cracker capacity to 40 million barrels, the net realizable value of refinery will increase to $2,625 million as against existing net realizable value of $2,520 million.
Prepare the statement showing calculation of net realizable value after expanding cat cracker capacity to 40 million barrels using the MS Excel sheet as shown below:
The result of the above excel is shown below:
d.
If the price differential remains the same at $4 per barrel, then company should process heavy crude oil which is purchased from K exports. Processing heavy crude oil results heavy distillates in quantity more than the maximum capacity of cat cracker (that is 40 million barrels whereas maximum capacity of cat cracker is 30 million barrels).
Thus, Mr. Q should expand the refinery's cat cracker capacity to 40 million barrels when the price differential between two crude oil is $4 per barrel.
e.
The expansion of cat cracker capacity should not be done. This is because the difference of price between west T intermediate and K export drops, there will be a negative NPV for the capital investment.
The reason is, if the price differential drops, then light distillates from west T would be preferable and expansion of cat cracker capacity is not needed in this case.
Q 4Q 4
Outback Opals
Outback Opals mines and processes opals from its Australian opal mines. The process consists of removing large chunks of stones, carefully splitting the stones and removing the opals, and then cutting and polishing the stones. Finally, the opals are sorted and graded (I, II, and III). The Grade I opals are sent to Outback's U.S. subsidiary for sale in the United States. The Graded II opals are sold through Outback's Hong Kong subsidiary in Hong Kong, and the Grade III opals are sold in Australia. It costs 35,000 Australian dollars (A$) to mine, cut, polish, and sort a batch of opals. The following table summarizes the number of stones in each batch mined, the additional costs to package and sell each stone after it is polished and graded, the selling price of each grade of stone (in Australian dollars), and the income tax rates that apply to any income derived from stones sold in the country of final sale.
Required:
a. Calculate the joint cost per stone of each grade of opal (I, II, and III) using the number of stones in each batch to allocate the A$35,000 joint mining, cutting, polishing, and sorting costs. (Round all decimals to four significant digits.)
b. Calculate the joint cost per stone of each grade of opal (I, II, and III) using the net realizable value of each grade of stones (before taxes) to allocate the A$35,000 joint mining, cutting, polishing, and sorting costs. (Round all decimals to four significant digits.)
c. Which method of allocating the joint cost of A$35,000 (number of stones or net realizable value) should Outback Opals use? Explain why.
Free
Essay
Q 5Q 5
Rose Hospital
Rose Hospital has two service departments (building services and food service) and three patient care units (intensive care, surgery, and general medicine). Building Services provides janitorial, maintenance, and engineering services, as well as space (utilities, depreciation, insurance, and taxes) to all departments and patient care units. Food Service provides meals to both patients and staff members. It operates a cafeteria and serves meals to patients in their rooms. Building services costs of $6 million are allocated based on square footage, and food service costs of $3 million are allocated based on number of meals served. The following two tables summarize the annual costs of the two service departments and the utilization of each service department by the other departments. Grade I Grade II Grade III
The following table summarizes the allocation of service department costs using the step-down method with Food Service as the first service department to be allocated:
Required:
(Round all allocation rates and all dollar amounts to two decimal places.)
a. Allocate the two service department costs to the three patient care units using the direct method of allocating service department costs.
b. Same as part (a) except use the step-down allocation method with Building Services as the first service department allocated.
c. Write a short, nontechnical memo to management explaining why the sum of the two service department costs allocated to each patient care unit in part (b) differs from the sum of the costs computed using the step-down method starting with Food Service.
Free
Essay
Q 6Q 6
Mystic Herbals
Mystic Herbals processes exotic plant materials into various fragrances and biological pastes used by perfume and cosmetic firms. One particular plant material, Xubonic root from the rain forest in Australia, is processed yielding four joint products: QV3, VX7, HM4, and LZ9. Each of these joint products can be sold as is after the joint production process or processed further. The following table describes the yield of each joint product from one batch, the selling prices of the intermediate and further processed products, and the costs of further processing each joint product. The joint cost of processing one batch of Xubonic root is $30,000.
Required:
a. Allocate the $30,000 joint cost per batch to each of the joint products based on the number of ounces in each joint product.
b. To maximize firm value, which of the joint products should be processed further and which should be sold without further processing?
c. Based on your analysis in part (b) regarding the decisions to process further or not, should Mystic Herbals process batches of Xubonic root into the four joint products? Support your decision with a quantitative analysis and indicate how much profit or loss Mystic Herbals makes per batch.
d. Suppose the joint cost of $30,000 is allocated using the net realizable value of each joint product. Calculate the profits (loss) per joint product after allocating the joint cost using net realizable value.
e. Explain how the use of joint cost allocations enhances or harms the decision to process joint products.
Free
Essay
Q 7Q 7
Berkman Financial
Berkman Financial is a regional bank that offers a variety of financial services to both retail and commercial customers. Berkman uses the step-down allocation method to allocate four service departments' costs (S1, S2, S3, and S4) to the three strategic business units (SBUs). Services provided by service departments are measured in "service units." The following table summarizes the cost of each of the four service departments and the number of service units used by the other service departments and SBUs:
In other words, Service Department S2 used 43 service units provided by S1 and SBU2 used 40 service units of S1. Likewise, S1 used 17 service units of S4 and SBU1 used 63 units of S4.
Required:
a. What is the cost per service unit of S1, and what is the cost per service unit of S2 if S1 is the first service department and S2 is the second department in the step-down order?
b. What is the cost per service unit of S1 and what is the cost per service unit of S2 if S2 is the first service department and S1 is the second department in the step-down order?
c. Describe briefly why the costs per service unit of S1 and S2 vary depending on the stepdown allocation order.
d. Should S1 come before S2 or vice versa in the step-down order? In other words, what factors should management consider in ordering the four departments in the step-down allocation method?
Free
Essay
Q 8Q 8
Joint Products, Inc.
Joint Products, Inc., produces two joint products, X and V, using a common input. These are produced in batches. The common input costs $8,000 per batch. To produce the final products (X and V), additional processing costs beyond the split-off point must be incurred. There are no beginning inventories. The accompanying data summarize the operations.
Required:
a. Compute the full cost of the ending inventory using net realizable value to allocate joint cost.
b. If the selling prices at the split-off point (before further processing) are $35 and $1 per pound of X and V, respectively, what should the firm do regarding further processing? Show calculations.
Free
Essay
Q 9Q 9
Upstate Growers
Upstate Growers (Upstate) is a cooperative corporation owned by 12 large apple farmers in New York State. Upstate is responsible for managing all 12 apple orchards, picking and sorting the apples, and producing the final apple products. Apples are washed and sorted into three grades: "large un-bruised apples," "large bruised apples," or "small apples." These three apple grades/categories comprise the final products produced and sold by Upstate. Large un-bruised apples are sold in supermarkets as whole "eating apples" after they are wrapped, packed, and shipped. Large bruised apples are peeled, cored, sauced, cooked, bottled, packed, and shipped to retailers as applesauce. And, small apples are juiced, cooked, filtered, and bottled as apple juice that is sold to supermarkets. Large un-bruised apples also can be converted into either applesauce or apple juice. Large bruised apples also can be juiced and bottled as apple juice like small apples, but cannot be sold as whole "eating apples." All three types of apples can be sold as is at $11 per 100 pounds of whole apples for use as livestock feed without incurring any additional costs.
All three types of apples (large bruised, large un-bruised, and small) are sorted into crates containing 100 pounds of apples. The cost of wrapping, packing, and shipping 100 pounds of large un-bruised apples is $12, which can be sold as whole apples for $31. The cost of peeling, coring, cooking, saucing, bottling, packing, and shipping 100 pounds of bruised large apples is $60, which can be sold as applesauce for $80. The cost of juicing, cooking, filtering, bottling, packing, and shipping 100 pounds of small apples is $28, which can be sold as apple juice for $34. Upstate harvested, washed, and sorted 4.6 million pounds of apples. The cost of operating the 12 orchards was $274,000, and the cost of picking, washing, and sorting the apples was $48,000. These 4.6 million pounds of apples yielded 9,300 (100-pound) crates of large un-bruised apples, 14,200 (100-pound) crates of large bruised apples, and 22,500 (100-pound) crates of small apples. The orchards' operating costs and the costs of picking, washing and sorting the apples are allocated to three apple categories based on apple weight.
Required:
a. Prepare a table that calculates the net profits of processing (1) a 100-pound crate of large un-bruised apples, (2) applesauce from a 100-pound crate of apples, and (3) apple juice from a 100-pound crate of apples after allocating the orchards' operating costs and the costs of picking, washing, and sorting the apples.
b. Given the data in the problem, what should Upstate Growers do with each of the three sorted categories of apples harvested? In other words, to maximize firm value prepare a production plan for the large un-bruised apples (sell as whole "eating apples," whole apples to be used as livestock feed, applesauce, or apple juice), the large bruised apples (sell as whole apples to be used as livestock feed, applesauce, or apple juice), and the small apples (sell as whole apples to be used as livestock feed or apple juice)? Explain the logic underlying your production plan.
Free
Essay
Q 10Q 10
Murray Hill's Untimely
Demise Murray Hill was preparing the monthly report that allocates the three service department's (A, B, and C) costs to the three operating divisions (D1, D2, and D3) when he choked to death on a stale double cream-filled donut. You must step in and complete his step-down allocations. The three service departments (A, B, and C) have costs (before any cost allocation) of:
The following table provides the percentage of utilization of each service department by the other service departments and the operating departments:
The step-down sequence is A, B, then C. Poor Murray allocated only A's costs before the donut did him in. His incomplete spreadsheet is:
Required:
a. Do Murray proud and complete the incomplete spreadsheet. Like Murray, round all cost allocations to the nearest dollar.
b. If the company wants the cost allocations to most accurately capture the opportunity cost of resources consumed by the operating divisions, how should the service departments be ordered in the step-down method?
Free
Essay
Q 11Q 11
Enzymes
Two genetically engineered enzymes are produced simultaneously from a series of chemical and biological processes: Q enzyme and Y enzyme. The cost per batch of Q and Y enzymes is $200,000, resulting in 300 grams of Q and 200 grams of Y. Before Q and Y can be sold, they must be processed further at costs of $100 and $150 per gram, respectively. Each batch requires one month of processing time and only one batch per month is produced.
The monthly demand for Q and Y depends on the price charged. The following table summarizes the various price-quantity combinations.
In the following analysis, the optimum price of Q is $900 per gram and the optimum price of Y is $750 per gram.
Required:
a. Critically evaluate the analysis underlying the pricing decisions of $900 for Q and $750 for Y.
b. What should management do if the cost per batch rises to $225,000?
Free
Essay
Q 12Q 12
Sunder Toys
Sunder manufactures hard rubber pet toys. The purple dog chewy has a variable cost of $3.00 per unit. It is produced on a machine that is leased. The three models of this machine have three different capacities.
There is no uncertainty (daily variation) with respect to the daily demand for purple dog chewies. For example, if the price is set at $14.18, 1,100 chewies will be sold every day with certainty.
Required:
a. Given all the data, how many purple dog chewies should Sunder produce and sell? (Show calculations, neatly labeled.)
b. Suppose Sunder has the policy of not charging fixed costs to products whenever excess capacity exists. The manager of purple dog chewies receives a bonus based on the accounting profits from purple dog chewies. This manager has private knowledge of machine 366 Chapter 8 capacities, lease fees, and the demand for purple dog chewies, as well as the decision rights over how large a machine to lease. How big a machine will the manager lease and how many chewies will be produced and sold? (Show calculations, neatly labeled.)
c. Comment on Sunder's policy of not charging fixed costs to products whenever excess capacity exists.
Free
Essay
Q 13Q 13
WWWeb Marketing
WWWeb Marketing is a decentralized firm specializing in designing and operating Internet marketing websites. The firm is four years old and has been growing rapidly, but it only shows a small profit. WWWeb has three profit centers: Design Division, Server Operations, and the Crawler Division. The Design Division devises Internet marketing strategies for external clients, including innovative websites and Web-based marketing strategies. Server Operations maintains the clients' websites on WWWeb's servers. The Crawler Division operates WWWeb's proprietary search engine that clients can use for Internet-based marketing research. In addition to these three profit centers, WWWeb has an IT group that maintains WWWeb's servers and telecommunication lines to the Internet.
The IT group is a cost center. The current annual IT budget is $548,000 for personnel, hardware and software leases for the servers, and telecommunication costs. The cost of the IT group is not allocated back to the three divisions. The CEO of WWWeb argues that the IT group is a common (shared) resource and is essentially a fixed cost. Adding another client website or performing a Web search does not generate any additional IT cost to the firm because WWWeb's IT group has excess capacity. WWWeb's CEO argues, "Any charge for IT back to the divisions will cause the divisions to avoid using our IT resources. As long as we have unused capacity on our systems we should be encouraging our people to use that capacity."
WWWeb currently uses about 80 percent of the capacity of its servers, routers, and fiber-optic high-speed lines to the Internet. The high-speed lines are the "pipes" through which all client server Web traffic flows. These high-speed lines are also used by WWWeb's e-mail traffic and the Crawler Divisions marketing research Web searches. Currently, the IT systems are performing well and WWWeb users experience few delays and minimal interference from other users. However, the three profit center managers are projecting growth in their businesses and expect to reach capacity on their servers and communication lines within the next 12 months. When this happens, the managers predict that they will experience significant service degradation.
Jose Coronas, head of WWWeb's IT group, has called a meeting of the three division managers to discuss the terrific deals being offered by telecom companies and hardware providers. Given the current slump in the economy, WWWeb can roughly double the capacity of its servers and highspeed access lines and lock in these low rates for two years. The incremental cost of doubling the IT group's capacity is to raise its hardware lease costs and access line costs by 20 percent. IT currently spends $18,000 a month on hardware leases and access lines. If it were to double its existing capacity, the total monthly cost would rise to $21,600. Mr. Coronas believes his existing IT personnel can handle the additional server and line capacity. Coronas and the three division managers recommend that WWWeb acquire the additional capacity and lock in these attractive rates.
Required:
a. Analyze WWWeb's current policy of how the three divisions are charged for IT costs and whether WWWeb should acquire the additional capacity.
b. Should WWWeb change its policy of how it charges IT costs to the divisions? If so, what changes would you recommend?
Free
Essay
Q 14Q 14
ITI Technology
ITI Technology designs and manufactures solid-state computer chips. In one of the production departments, employees fabricate a six-inch circular wafer by laying down successive layers of silicon and then etching the circuits into the layers. Each wafer contains 100 separate solid-state computer chips. After a wafer is manufactured, the 100 chips are cut out of the wafer, tested, mounted into protective covers, and attached to electrical leads. Then a final quality control test is performed. The initial testing process consists of successive stages of heating and cooling the chips and testing how they work. If 99 percent of a chip's circuits work properly after the testing, it is classified as a high-density (HD) chip. If between 75 percent and 99 percent of a chip's circuits work properly, it is classified as a low-density (LD) chip. If fewer than 75 percent of the circuits work, it is discarded. Twenty wafers are manufactured in a batch. On average, 50 percent of each batch are HD, 20 percent are LD, and 30 percent are discarded. HD chips are sold to defense contractors and LD chips to consumer electronics firms. Chips sold to defense contractors require different mountings, packaging, and distribution channels than chips sold to consumer electronics firms. HD chips sell for $30 each and LD chips sell for $16 each.
Each batch of 20 wafers costs $29,100: $8,000 to produce, test, and sort, and $21,100 for mounting, attaching leads, and final inspection and distribution costs ($14,500 for HD chips and $6,600 for LD chips). The $29,100 total cost per batch consists of direct labor, direct materials, and variable overhead.
The following report summarizes the operating data per batch:
The cost of scrap is charged to a plantwide overhead account, which is then allocated directly to the lines of business based on profits in each LOB.
Required:
a. Critically evaluate ITI's method of accounting for HD and LD chips.
b. What suggestions would you offer ITI's management?
Free
Essay
Q 15Q 15
Metro Blood Bank
Metro Blood Bank, a for-profit firm, collects whole blood from donors, tests it, and then separates it into two components: platelets and plasma. Three pints of whole blood yield two pints of platelets and one pint of plasma. The cost of collecting the three pints, testing them, and separating them is $300.
The platelets are sold for $165 per pint. But before they are sold they must be packaged and labeled. The variable cost of this additional processing is $15 per pint. Plasma is sold for $115 per pint after incurring additional variable processing costs of $45 per pint.
The selling prices of the platelets and plasma are set by competitive market forces. The prices of platelets and plasma quoted above are the current market prices, but they vary widely depending on supply and demand conditions. Metro Blood Bank ships its products nationwide to maximize profits. It has three operating divisions: blood collection and processing, platelets, and plasma. Collection and processing is a cost center, and platelets and plasma are profit centers.
Neither platelets nor plasma has any commercial value without further processing.
Required:
a. Prepare two statements showing the profits per pint of platelets and plasma with collection and processing costs assigned using: (1) The number of pints of platelets and plasma produced from the whole blood. (2) The net realizable value of platelets and plasma.
b. Discuss the advantages and disadvantages of each of the methods in part (a) for assigning collection and processing costs to the blood products.
Free
Essay
Q 16Q 16
Vigdor Wood Products
Vigdor processes cut trees into various wood products, veneers, lumber, wood chips, and so forth. Each of the products can be sold immediately upon processing the trees, or processed further and sold as a finished product. The following table lists the five products produced from each batch of trees, the tons of each product per batch, and the prices for the intermediate and finished products. The net cash outflow to convert each intermediate product into a finished product is $12 per ton. The net cash outflow to process one batch of trees into the five separate wood products is $800.
Required:
a. Given that Vigdor processes batches of trees into the five wood products, which of the five wood products should be sold as intermediate products (i.e., not processed further), and which ones should be sold as finished products (i.e., processed further)?
b. If Vigdor's cost to process trees into the five wood products is $800, should Vigdor process trees?
c. Assuming that the quantities and prices in the preceding table do not change, how high can the $800 cost to process one batch rise before Vigdor stops processing trees into the five wood products?
d. Assuming that the cost to process trees into the five wood products is $800, and given your decisions in part (a), calculate the profit per ton of each of the five wood products after allocating the $800 processing cost to the five wood products using: (1) Tons of wood products produced. (2) Net realizable value of wood products produced.
e. Given the allocations of the $800 cost of processing trees in part (d), would you want to change any of your decisions in part (a), assuming your objective is to maximize the net cash flows for Vigdor?
f. Describe how the allocation of the $800 cost of processing trees into the five wood products affected your decisions in parts (a) and (b).
Free
Essay
Q 17Q 17
Advanced Micro Processors
Advanced Micro Processors (AMP) has designed a new dual-core microprocessor, dubbed DUALxl. DUALxl microprocessors are produced on silicon wafers with 100 chips per wafer. Once fabricated, the wafer is cut into individual microprocessors (also called "chips"). Then each chip is mounted on a base encased in a protective epoxy coating and tested. Because of slight impurities in the silicon and other compounds used in producing the wafers, as well as small perturbations in the manufacturing equipment, 60 microprocessors meet the rigorous testing and can be sold as a DUALxl microprocessor. Thirty microprocessors have small defects that prevent them from being sold as DUALxl chips. But these microprocessors can be sold as MAXV microprocessors. Of the 100 chips, 10 are of no commercial value and are scrapped.
Two hundred wafers are produced in each batch that costs $270,000. Each batch of 20,000 chips yields 12,000 DUALxl's and 6,000 MAXV's, and 2,000 chips are scrapped. The $270,000 batch cost is entirely variable. That is, producing one additional batch generates an "out-of-pocket" cash outflow of $270,000.
The following table summarizes AMP's operations for the current year:
AMP sells the DUALxl chips for $120 and the MAXV chips for $25. The DUALxl and MAXV microprocessors are sold through separate selling and distribution channels that are separate organizations.
Actual fixed selling and distribution costs were the same as budgeted total fixed selling and distribution costs ($360,000 and $120,000); the actual chip fabrication cost was the same as the budgeted chip fabrication cost ($270,000); and the actual variable selling costs were the same as the budgeted amounts ($55 and $8). There were no beginning inventories of DUALxl or MAXV microprocessors.
Required:
a. Prepare individual income statements for DUALxl and MAXV microprocessors for the current year.
b. What are the inventory balances of DUALxl and MAXV microprocessors on AMP's balance sheet at the end of the current year?
c. Analyze the relative profitability of the DUALxl and MAXV microprocessors based on their respective income statements prepared in part (a). What advice would you offer management?
Free
Essay
Q 18Q 18
Jason Rocks
Jason Rocks is a small rock quarry that produces five different sizes of stones, from small crushed stones (#1 stones) to large (three-inch) rocks (#5 stones). The stones are first mined and sorted into the five grades. Once the stones are mined and sorted, they can be sold to a local distributor either washed or unwashed. Jason Rocks mines and sorts 500 tons of stone each day and is a price taker in the local stone market. The following table contains the percentage of each type of stone quarried
The daily cost of mining and sorting the stones is $75,000, which includes the salaries and benefits
of the employees who quarry and sort the stones, the depreciation on the equipment used in the process, the royalty payments to owners of the quarry for the stone removed, and an allocation of the utilities, insurance, property taxes, and administrative costs of the entire quarry operation. Washing any of the five types of stone costs $8 per ton, and delivering the stone to the local distributor costs $7 per ton. Jason Rocks allocates the mining and sorting costs based on the tons of each type of stone produced. Jason Rocks does not have to sell all of the types of stones it produces. Any unsold stones are left in the quarry at no additional cost after they have been mined and sorted. The owners of Jason Rocks want to maximize the quarry's net cash flows.
Required:
a. For each of the five stone types, calculate the total cost of one ton of unwashed stones in inventory. b. For each of the five stone types, calculate the total cost of one ton of washed stones in inventory.
c. What is the reported profit per ton of each type of unwashed stone that is sold?
d. What is the reported profit per ton of each type of washed stone that is sold?
e. Which of the five stone types should be sold as washed stones, and which stone types should be sold as unwashed stones? Which stone type(s) should not be sold?
f. The owners of Jason Rocks learn that new environmental and safety regulations have been enacted that will raise its operating costs to $85,000 per day. The owners do not expect these regulations to affect the selling prices of the washed and unwashed stones, nor do they expect them to affect the costs of washing and delivering the stones. Given this new information, how do your answers in part (e) change?
Free
Essay
Q 19Q 19
Ferguson Metals
Ferguson Metals is a decentralized mining, smelting, and metals company with three divisions: mining, lead, and copper. The mining division owns the ore mine that produces the lead and copper that occur in the vein. Mining removes the ore, crushes it, and smelts it to separate the metals from the crushed rock. It then sells the two products to the other two divisions: lead and copper. Each batch mined yields 50 tons of lead and 25 tons of copper. (One ton is 2,000 pounds.) The metals are transferred from mining to the lead and copper divisions at cost plus a small profit to give mining an incentive to produce.
The current market price for copper is roughly $0.60 per pound; for lead it is $0.30 per pound. But these prices are for substantially purer copper and lead than the mining division has the ability to produce. Mining could sell its lead in the market at its current purity level for $0.17 per pound. Since the metal divisions are currently incurring the cost to refine the metals to the purity levels they require, management does not believe it is equitable to charge the divisions the current market prices for the unrefined metals. If the metals were transferred at market prices, the lead and copper divisions would be paying twice for the refining process, and the mining division would be rewarded for a level of purity it is not providing.
Table 1 shows the mining division's income statement per batch. The variable mining and smelting costs per ton of lead and copper are based on the fixed yields of the two metals. Production last year at mining was 100 batches, and both the lead and copper divisions had no change in inventory levels.
The lead and copper divisions further process the two metals into industrial products. Because of increasing foreign competition, the lead division has been showing a negligible return on investment. Table 2 shows income statements for the two metal divisions for last year.
All of the fixed costs in both the lead and copper divisions represent separable annual cash outflows to maintain current capacity. They are not common costs. Ferguson's top management has the opportunity to invest in what appears to be a highly profitable joint mining venture, which promises very high returns. Ferguson's share of the net present value of the venture is around $30 million, discounted at the firm's before-tax cost of capital of 12 percent. To finance this project, the company is considering divestiture of the lead division. A foreign company looking to gain a foothold in the U.S. market has offered $5 million for this division. While Ferguson's net investment in this division is $10 million, management reasons it can use the proceeds to undertake the joint venture.
Required: Should management sell the lead division to the foreign company? Present an analysis supporting your conclusions.
Free
Essay
Q 20Q 20
Polymtech
Polymtech uses advanced laser technology to manufacture polymers for a variety of applications. One of their processes produces four separate polymers (N200, HV87, HMT45, and V989) in one batch containing 1,000 grams of final product. The proportion of each polymer produced in the batch is fixed by the chemistry of the process and cannot be altered. Each of the four polymers produced in the batch can either be sold as is or further processed and sold at a higher price. Each batch producing the four polymers costs $2090.00 per batch before further processing any of the four polymers. The following table summarizes the output per batch, the selling price per gram with and without further processing, and the cost of further processing.
Required:
a. Which of the four polymers should be processed further and then sold, and which polymers should be sold immediately without further processing?
b. Should Polymtech be producing batches of these four polymers?
c. What is the maximum cost per batch (excluding any further processing costs) that Polymtech is willing to incur before Polymtech stops producing batches of these four polymers? Assume that all selling prices and further processing costs do not change.
d. To analyze the relative profitability of the four polymers, allocate the batch production cost of $2,090 to each of the four polymers using the number of grams of each polymer produced in the batch as the allocation base. Which polymer is the most and which polymer is the least profitable after allocating the $2,090 batch cost?
e. Based on your analysis in part (d), recommend actions that management can take to improve the profitability of producing batches of these four polymers.
Free
Essay
Q 21Q 21
RBB Brands
You are working on a special assignment as a financial analyst for the president of household products of RBB Brands. RBB Brands is a large $4 billion diversified consumer products firm. RBB has two divisions, household products and foods, each headed by a president. Each division is evaluated as a profit center. The senior managers of each division receive bonuses paid out of a pool equal to 1 percent of the division's accounting profits. Both divisions receive services from two corporate service departments: engineering and maintenance.
The president of household products attended a meeting at which the corporate controller made a presentation proposing that the two divisions' accounting profits be charged for engineering and maintenance services. Table 1 summarizes each division's use of the two service departments, as well as each service department's use of the other service department (as well as its own use).
The controller then distributed Tables 2 and 3. He explained that each division would be charged for the hours of maintenance and engineering it actually used. The charge per hour would be based on the allocated cost of the service department. Table 2 reports the allocation of service department costs using the step-down allocation method starting with maintenance costs. Table 3 reports the allocation of service department costs using the step-down allocation method but starting with engineering costs. The controller's office is considering adopting one of these two methods and is seeking input from the divisions.
T ABLE 2 RBB Brands
Allocation of Service Department Costs Using Step-Down Allocation First Department Allocated: Maintenance (Millions of
Dollars Except Cost per Hour)
Required:
Analyze and critically evaluate the controller's proposal in a position paper to the president of household products. In addition, provide a series of key points that the president can raise at the next meeting with the corporate controller and corporate management.
Free
Essay
Q 22Q 22
Karsten Mills
Karsten Mills is one of the premier carpet manufacturers in the world. It manufactures carpeting for both residential and commercial applications. Home sales and commercial sales each account for about 50 percent of total revenue. The firm is organized into three departments: manufacturing, residential sales, and commercial sales. Manufacturing is a cost center and the two sales departments are profit centers. The full cost of each roll of carpeting produced (including fully absorbed overhead) is transferred to the sales department ordering the carpet. The sales departments are evaluated as profit centers; the full cost of each roll is the transfer price.
The current manufacturing plant is at capacity. A new plant is being built that will more than double the capacity. Within two years, management believes that it can grow Karsten's businesses such that most of the excess capacity will be eliminated. When the new plant comes on line, one plant will produce exclusively commercial carpeting and the other will produce exclusively residential carpeting. This change will simplify scheduling, ordering, and inventory control in both plants and will create some economies of scale through longer mill runs. Nevertheless, it will take a couple of years before these economies of scale can be realized.
Each mill produces carpeting in 12-foot-wide rolls of up to 100 yards in length. The output of each mill is measured in yards produced. Overhead is assigned to carpet rolls using carpet yards produced in the mill. The cost structure of each plant is as follows:
Besides being able to run at higher speed, producing more carpet yardage per hour, the new mill will use 15 percent less direct material and direct labor because the new, more automated machines produce less scrap and require less direct labor per yard. The cost of a job run at the old mill is
Although the new mill has lower direct costs of producing carpeting than the old mill, the higher overhead costs per yard at the new mill have the sales department managers worried. They are already lobbying senior management to have the old mill assigned to produce their products. The commercial sales department manager argues, "More of my customers are located closer to the old plant than are residential sales' customers. Therefore, to economize on transportation costs, my products should be produced in the old plant." The residential sales department manager counters with the following argument: "Transportation costs are less than 1 percent of total revenues. The new plant should produce commercial products because we expect new commercial products to use more synthetic materials and the latest technology at the new mill is better able to adapt to the new synthetics." Senior management is worried about how to deal with the two sales department managers' reluctance to have their products produced at the new plant. One suggestion put forth is for each plant to produce about half of commercial sales products and about half of residential sales products. But this proposal would eliminate most of the economies of scale that would result from specializing production in each plant to one market segment.
Required:
a. Calculate the overhead rates for the new plant and the old plant, where overhead is assigned to carpet based on normal yards per year.
b. Calculate the expected total cost of carpet A6106 if run at the old mill and if run at the new mill.
c. Put forth two new solutions that would overcome the resistance of the residential and commercial sales department managers to the new plant. Discuss the pros and cons of your two solutions.
Free
Essay
Q 23Q 23
Impact Designs
Impact Designs embroiders corporate and sports logos on clothing using state-of-the-art multiplehead digital embroidering machines. Impact Designs is considering adding a new machine to enter the college and university market for athletic clothing (sports jerseys, jackets, caps, etc.). The client would buy the clothing and ship it to Impact Designs for embroidering. Impact Designs would only charge the client for embroidering the college's graphic design. The following table summarizes the price-quantity relation Impact Designs expects to face if it enters this college athletic gear market.
(Assume that all graphic designs that colleges use are of equal complexity and hence embroidering services can be priced per embroidery.)
Impact Design can lease various machines that provide different embroidering capacities. The following table summarizes the monthly lease fee, operating costs, and capacities of the various embroidering machines. The lease contract requires Impact Designs to lease the equipment for five years.
Required:
a. What size of machine will a firm-value-maximizing owner of Impact Designs lease, and what price will the owner set for an embroidery? Support your answer with clearly labeled computations. Assume that the market demand for embroideries at the various prices is perfectly certain over the life of the lease.
b. Impact Designs is organized into operating divisions. Each division manager is paid a fixed salary plus a bonus that depends in part on his/her division's profits. Impact Designs excludes fixed manufacturing capacity costs from the calculation of division profits whenever the division has excess capacity. Discuss possible reasons it might be beneficial for the calculation of division profits whenever excess manufacturing capacity exists.
c. The manager of the newly created college athletic gear market will be paid a fixed salary plus a bonus that depends in part on the college athletic gear division's profits. Impact Designs excludes fixed manufacturing capacity costs from the calculation of division profits whenever the division has excess capacity. The corporate executive and owners of Impact Designs do not know how the quantity of embroideries demanded by the market may vary with the price of an embroidery. This information is only known by the college athletic gear division manager. What size machine will the college athletic gear division manager lease? Support your answer with clearly labeled computations. Assume that the market demand for embroideries at the various prices is perfectly certain over the life of the lease.
d. Discuss why your answers in parts (a) and (c) are either the same or differ
Free
Not Answered
There is no answer for this question
Q 24Q 24
Littleton Medical Center
Littleton Medical Center (LMC) has three service departments (accounting, human resources, andjanitorial/maintenance) and two patient units (hospital and an outpatient clinic). The following table summarizes the operations of LMC for the last fiscal year.
These department costs are allocated to the two patient units (hospital and clinic). The following table summarizes the allocation bases used to allocate each service department and the utilization of each allocation base.
Required:
a. Allocate the three service departments' costs (HR, Accounting, and Janitorial/Maintenance) to the two patient units (Clinic and Hospital) using the direct allocation method.
b. Allocate the three service departments' costs (HR, Accounting, and Janitorial/Maintenance) to the two patient units (Clinic and Hospital) using the step-down allocation method. The order of the three departments is: (1) HR, (2) Accounting, and (3) Janitorial/ Maintenance.
c. What are the primary advantages of the step-down method compared to the direct allocation method?
Free
Essay
Q 25Q 25
Aurora Medical Center
Aurora Medical Center (AMC), located outside Phoenix, has an inpatient hospital and outpatient clinic. Because it is located in a retirement area, a substantial fraction of its patients are elderly, and hence their medical insurance is provided through the Medicare program of the federal government. Medicare outpatient clinic care is reimbursed by the federal government at cost. Each clinic with Medicare outpatients submits a reimbursement form to Medicare reporting the costs of treating these patients. Medicare inpatient reimbursement is based on predetermined rates depending on the diagnosis. For example, all Medicare-paid hip replacements in Phoenix are reimbursed at $14,800 per patient, regardless of the hospital's cost.
AMC has two administrative departments that provide services to both the hospital and the clinic: accounting and information management (IM). The accompanying tables summarize the service levels provided by these two departments:
Accounting department costs are distributed to users based on the number of transactions posted to the general ledger generated by that user. IM costs are distributed to users based on the gigabytes of storage dedicated to the user. Medicare guidelines allow these allocation bases to be used. Medicare also provides some discretion to hospitals in the methods used to allocate costs, as long as they are reasonable and generally accepted.
Required:
a. Design a report for assigning the accounting and IM costs to the hospital and clinic. How much of the costs of accounting and IM should be allocated to inpatients and outpatients?
b. Justify your design in part (a). Explain why AMC should follow your suggestions.
Free
Essay
Q 26Q 26
Grove City Broadcasting
Grove City Broadcasting owns and operates a radio station and a television station in Grove City. Both stations are located in the same building and are operated as separate profit centers with separate managers, who are evaluated based on station profits. Revenues of both the radio and the TV station are from advertising spots. The price of a standard 30-second ad is based on audience size, which is measured by an independent outside agency. The radio station sells a 30-second ad for $100. (Assume that all 30-second ads sell for $100 regardless of the time of day they air.) The $100 price is based on an expected audience size of 20,000 listeners. If the listener audience were to double, the 30-second ad would sell for $200. In other words, each radio listener is worth $0.005 ($100 ÷ 20,000) of advertising revenue per 30-second ad. Each TV viewer is worth $0.008 per 30-second ad. The radio station sells 3,550 ads per month, and the TV station sells 3,200 ads per month.
Sports Wire has approached both the radio and television managers about subscribing to its service, which brings all sports scores, sports news, and sports analyses to the station via an on-line computer system over the Internet. The radio and/or TV stations' sports announcers could download scores and news directly into sports scripts and read them over the air. Sports Wire is more comprehensive and contains more sports stories than the current general news wires that Grove City is receiving. If one of the two stations buys Sports Wire, the price is $30,000 per month. For an extra $5,000 per month, both the radio and the TV station can use Sports Wire. If both stations use Sports Wire, the $5,000 additional fee includes an extra computer terminal that allows two users to be on the system at the same time.
Sports Wire will not increase the number of ads each month, just the revenue per ad. The Grove City radio manager believes that purchasing Sports Wire would increase his audience by 1,500 listeners per ad. The television manager believes her audience size would increase by 500 viewers per ad.
Required:
a. If the two managers did not cooperate but rather each made a decision assuming he or she was the sole user of the system, would either buy Sports Wire? Support your answer with detailed calculations.
b. If the owner of Grove City Broadcasting had all the facts available to the two managers, would the owner buy Sports Wire?
c. The costs of the current wire services that Grove City purchases are allocated to the two stations based on the number of stories aired each month from the wire services. The owner of Grove City Broadcasting decides to purchase Sports Wire for both stations and to allocate its $35,000 cost based on the number of Sports Wire stories aired each month. During the first month, the radio station uses 826 Sports Wire stories and TV uses 574. Allocate the Sports Wire cost to the radio and TV stations.
d. What is the allocated cost per Sports Wire story in the first month?
e. Given the allocation of the Sports Wire cost, what behaviors can you predict from the radio and TV station managers?
f. Design an alternative allocation scheme that will avoid the problems identified in part (e). Discuss the advantages and disadvantages of your allocation scheme.
Free
Essay
Q 27Q 27
Gemini Logistics
Gemini Logistics (GL) offers packaging and shipping solutions to small and medium-sized companies in the greater metropolitan New York City region that do not have scale economies to do in-house packaging and shipping, and yet have special requirements preventing them from utilizing UPS pack/ship services. GL runs a fleet of trucks in the NYC area collecting parcels and next-daydelivery pouches. The GL warehouse is near the Newark, New Jersey, airport, which is used for shipping all GL packages. GL negotiates bulk discount rates with FedEx, UPS, and DHL for the final delivery of GL packages to end customers of GL clients. For example, an online seller of used DVDs receives domestic orders for DVDs. This online seller has GL pick up, package, label, and ship the DVD to the end user.
GL has three operating divisions (profit centers): Domestic Parcel, Domestic Pouch (next-daydelivery), and International. Each operating division serves a different customer set and hence has its own direct sales organization. However, all three divisions share the same common resources of its Newark warehouse and the GL truck fleet.
Currently, GL uses bar coding to uniquely identify, label, and track shipments through GL's system and the carrier (UPS, FedEx, or DHL). Radio-frequency identification (RFID) is starting to substitute for bar coding technology. RFID involves a small electronic tag the size of a postage stamp that emits radio waves to transfer data between a reader and the tag attached to the item being shipped. Each item being shipped will have its own unique identifying number, allowing GL more accurate packaging, labeling, and shipping. UPS, FedEx, and DHL already deploy RFID tagging. Each tag costs $0.09 per shipped package.
GL estimates that a fully deployed RFID system in its warehouse will allow each division to generate additional net operating margins by allowing the GL division to raise its shipping fees, attract new customers wanting this new technology, and lower its operating costs from shipping errors and lower handling costs in the warehouse. The following table presents estimates of the additional net operating margin and the total number of shipments in the three divisions if RFID technology is deployed by GL.
In other words, the international division currently has net operating margins of $4.8 million, and this will rise by 7 percent if RFID is adopted. Net operating margin is shipping fees received by the GL division less all direct costs incurred by the division (such as labor costs of employees assigned to the division and payment to the carriers [UPS, FedEx, DHL]), but excludes the allocation of any common shared resources (such as the cost of the truck fleet, warehousing costs, corporate offices, marketing, etc.).
In addition to the RFID tags required on each package, a fully functional RFID system requires RF readers, middleware to filter RFID data, upgrades to GL's enterprise warehouse management systems and networks, and other IT hardware. GL estimates the additional annual fixed cost of a RFID system (not including the cost of the individual tags) to be $450,000.
Each GL division (Domestic Parcel, Domestic Pouch, and International) is a profit center and is evaluated (and rewarded) based on net operating margin less its allocated cost of all shared common resources such as the truck fleet, warehousing costs, and the costs of the RFID technology (if adopted). All shared common costs (including the total cost of the RFID system) are allocated based on the number of packages shipped by the division.
Required:
a. The chief information technology officer of GL proposes that GL adopts RFID and that each of the divisions pay its share of the technology using GL's usual method for allocating shared common costs. Each division can choose to opt in or opt out of the RFID system. Will all three divisions of GL be in favor of the new RFID technology? Support your answer with an analysis of the costs and benefits of RFID for each of the three divisions.
b. If one or two of the divisions decide to opt out of the RFID system, will the remaining division(s) continue to pursue the RFID system? Again, support your answer with an analysis of the costs and benefits of RFID to the division(s) that favored the RFID system in part (a).
c. Suppose senior management makes the decision to adopt RFID rather than allowing the three divisions to choose to opt in or opt out, would senior management adopt RFID (assuming they want to maximize firm value)? Support your answer with an analysis of the costs and benefits of RFID to GL.
d. Gemini Logistics has the policy of decentralizing decision making to the three operating divisions and then rewarding the divisions based on their operating results (after charging the divisions for all the direct and indirect costs incurred by the divisions). Discuss some possible reasons most firms have the policy of charging their operating divisions for common shared resources (such as the RFID system) and the problems such a policy can create.
e. Write a short memo describing what, if any, changes you recommend to GL regarding its policy of charging divisions for their share of common shared resources.
Free
Not Answered
There is no answer for this question
Q 28Q 28
Tariffs Inc.
Tariffs Inc. manufactures two product lines in the same plant: AllDomestic and SomeDomestic. Both product lines are sold in Tariff Inc.'s home country. AllDomestic is produced entirely from parts either manufactured by Tariffs Inc. or purchased from outside vendors that are domiciled in Tariffs Inc.'s home country. SomeDomestic consists of parts manufactured both inside and outside Tariffs Inc.'s home country. Tariffs Inc.'s home country has tariff regulations that require all manufacturers of products sold in the home country to pay a sizeable tariff unless the domestic content of the product is at least 50 percent of the total cost of the product. In other words, if a product sold in Tariffs Inc.'s home country has foreign content of 50 percent, then a sizeable tariff must be paid by the manufacturer (i.e., Tariffs Inc.). If the product has foreign content of 49.99 percent, then no tariff is assessed. Foreign content is measured by the ratio of costs incurred outside the home country to total costs incurred (foreign plus domestic costs). For purposes of computing costs, foreign and domestic costs include both the direct and indirect costs. The following table summarizes the total direct foreign and total direct domestic costs of Tariff Inc.'s two product lines.
Besides the domestic direct costs Tariffs Inc. incurs to manufacture the two product lines, it also has domestic indirect (common) costs. These domestic indirect costs are in two service departments: S1 and S2. S1 and S2 are domiciled in Tariffs Inc.'s home country and, hence, are treated as domestic costs in tariff calculations. The total cost of operating S1 is $500 and the total cost of operating S2 is $2,000. (Note: These figures do not include any allocated costs from the other service department.) AllDomestic and SomeDomestic require the services of each of these two service centers as part of their manufacturing process. Moreover, each service department uses the services of the other service department. The following table summarizes the number of service units consumed of each service department by the other service department and by the two product lines, AllDomestic and SomeDomestic.
In other words, S2 consumes 100 service units of S1 and AllDomestic consumes 300 service units of S1.
Required:
a. Allocate the costs of S1 ($500) and S2 ($2,000) to the AllDomestic and the SomeDomestic product lines using the direct allocation method.
b. Allocate the costs of S1 ($500) and S2 ($2,000) to the AllDomestic and the SomeDomestic product lines using the step-down allocation method where S1 is allocated first and S2 is allocated second.
c. Allocate the costs of S1 ($500) and S2 ($2,000) to the AllDomestic and the SomeDomestic product lines using the step-down allocation method where S2 is allocated first and S1 is allocated second.
d. Which allocation method (a, b, or c) should Tariffs Inc. use? Explain why. Assume Tariffs Inc. does not use indirect cost allocations to measure and reward the performance of managers in Tariffs Inc., the allocated costs are not used for any decision-making purposes, and Tariffs Inc. pays no other taxes other than possible tariffs.
e. Assume the tariff rate is 20 percent of the total cost of manufacturing the product (domestic content cost plus foreign content cost including all allocated indirect cost). How much tariff will Tariffs Inc. pay based on your recommended allocation method in part (d)?
Free
Essay
Q 29Q 29
Thompson Instruments
Thompson Instruments (TI) has proprietary technology and produces products for three market segments: commercial, defense, and international. Thompson has three profit centers organized by the same three market segments. After each profit center produces its products, they are sent to a centralized TI testing lab for final testing and certification. The TI testing lab, which is treated as a cost center, has the following cost structure: fixed costs of $240,000 per month and variable costs of $30 per testing hour performed. The $240,000 of fixed costs consists almost entirely of historical cost depreciation of the testing equipment.
Outside testing firms can also be used to test TI products produced by the three profit centers. Each outside testing firm can only test products for one TI market segment (commercial, defense, or international). Geographic and technical differences among the outside testing vendors prevent the defense vendor from testing commercial or international TI products. Likewise, the defense vendor can only test TI defense products. And so forth.
The following table summarizes the prices charged by the outside testing vendors and the number of testing hours budgeted for each month for Year One. (Assume that all 12 months in each year are identical.)
Thompson Instruments has the policy of recharging the testing department's fixed and variable costs through a single overhead rate set at the beginning of the year based on the budgeted testing hours of all three profit centers. Each profit center has the decision-making authority to have its products tested internally by TI's testing department or by the external vendor. Assume the only difference between TI's testing department and the outside testing vendors is price. Quality, timeliness, confidentiality, and so forth, are identical between inside and outside testing.
Required:
a. Calculate the testing department's overhead rate per testing hour for Year 1.
b. Given the testing department's overhead rate computed in part (a) for Year 1, which profit centers will choose TI's testing for their products, and which profit centers will use the outside vendor?
c. Before Year 2 begins and before the TI testing department lab overhead rate is set for Year 2, TI's defense profit center loses a government contract that involves 1,000 testing hours per month. Calculate the testing department's overhead rate per testing hour for Year 2, assuming that the other two profit centers continue to have the same number of testing hours they used in Year 1 and that the TI testing department's fixed cost and variable cost per hour do not change.
d. Given the testing department's overhead rate computed in part (c) for Year 2, which profit centers will choose TI's testing for their products, and which profit centers will use their outside vendor?
e. Based on your answer to part (d), and assuming: (1) the TI testing department's fixed cost and variable cost per hour do not change, (2) Defense does not regain the lost contract, and (3) the Year 3 overhead rate set in the testing department is based on the number of testing hours performed by the testing department in Year 2, calculate the testing department's overhead rate in Year 3.
f. Given the testing department's overhead rate computed in part (e) for Year 3, which profit centers will choose TI's testing for their products, and which profit centers will use their outside vendor?
g. Based on your answer to part (f), and assuming: (1) the TI testing department's fixed cost and variable cost per hour do not change, (2) Defense does not regain the lost contract, and (3) the Year 4 overhead rate set in the testing department is based on the number of testing hours performed by the testing department in Year 3, calculate the testing department's overhead rate in Year 4.
h. Given the testing department's overhead rate computed in part (g) for Year 4, which profit centers will choose TI's testing for their products, and which profit centers will use their outside vendor?
i. Given the sequence of events that have occurred over Years 1 through 4, what problem does TI face? Propose (and then critique) TWO possible solutions to resolve the problem.
Free
Essay
Q 30Q 30
Columbine Granite
Columbine Granite produces a number of different granite products from its granite quarry in Georgia. The production process begins when a 50-foot-tall block of solid granite is excavated from the mountain quarry. These huge blocks of granite are drilled and broken into movable smaller blocks for processing into building materials. The smaller blocks are cut into granite slabs of desired thickness and the granite slabs are then polished using abrasives and diamond polishing wheels to enhance the beauty of the granite. The slabs are then sorted by size. Some slabs will be cut to smaller dimensions due to natural imperfections in the stone. The larger pieces that cannot be used in slabs are broken up for decorative stone. Sand and stone dust result from cutting the 50-foot blocks out of the mountain, cutting these into smaller blocks, cutting these smaller blocks into slabs, and from producing the decorative stones. A 50-foot-tall block of granite produces the following finished products:
The cost of removing the 50-foot block from the mountain, cutting it into smaller blocks, and then the cost of cutting the slabs is $183,000. A 50-foot block produces, on average, 937.5 4? × 8? slabs and the cost of polishing one 4? × 8? slab is $96. A 50-foot block produces, on average, 500 4? × 12? slabs and the cost of polishing one 4? × 12? slab is $144. The cost of finishing and packaging the 330 tons of sand and stone dust is $500, and the cost of further grinding and packaging the 577.5 tons of decorative stones is $2,500.
Once each of the four products is finished (i.e., the sand and stone dust is finished and packaged and the slabs are polished), they are sold for the following amounts:
Required:
a. Allocate the $183,000 cost of removing the 50-foot block from the mountain, cutting it into smaller blocks, and cutting the smaller blocks into slabs to the four products using tons of each product produced from the 50-foot block as the allocation base.
b. Calculate the total profits of producing each of the four products and the total profit of processing a 50-foot block after allocating the $183,000 cost to the four products using tons of each product produced from part (a).
c. Allocate the $183,000 cost of removing the 50-foot block from the mountain, cutting it into smaller blocks, and cutting the smaller blocks into slabs to the four products using the cubic feet (volume) of each product produced from the 50? × 20? × 20? block as the allocation base.
d. Calculate the total profits of producing each of the four products and the total profit of processing a 50-foot block from the mountain after allocating the $183,000 cost to the four products using cubic feet (volume) of each product produced from part (c).
e. Which of the four products (i.e., sand and stone dust, decorative stones, the 4? × 8? slabs, and the 4? × 12? slabs) should Columbine sell and which ones should not be sold? Assume that the products Columbine decides not to sell can be used as fill material in the quarry. There is no cost of hauling the unsold products back to the quarry, and any unsold products do not incur the additional processing costs (i.e., the sand and stone dust does not require any packaging, the decorative stones do not require further grinding and packaging, or the 4? × 8? and 4? × 12? slabs do not require any polishing). Justify your answer.
f. Should Columbine Granite use tons or cubic feet (volume) to allocate the $183,000 cost of removing the 50-foot block from the mountain, cutting it into smaller blocks, and cutting the smaller blocks into slabs to the four products? Justify your recommendation based on well-reasoned arguments.
Free
Essay
Q 31Q 31
Palabora Mining
Palabora Mining owns and operates a copper mine. Besides producing copper, the mine also produces magnetite, vermiculite, and titanium dioxide. To extract the ore and to separate the four minerals (copper, magnetite, vermiculite, and titanium dioxide) costs $680,000 per batch and yields 175 tons of unprocessed copper, 2,400 tons of unprocessed magnetite, 1,600 tons of unprocessed vermiculite, and 320 tons of unprocessed titanium dioxide.
Each batch produced yields the same proportions of the four minerals and the proportions cannot be varied by changing mining operations. The $680,000 cost per batch consists of the direct, out-of-pocket costs to mine and separate the four minerals. Each unprocessed mineral can be sold unprocessed or processed further and sold as a more refined product. The following table summarizes for each of the four minerals the tons per batch, the price per ton if sold after further processing, the price per ton if sold unprocessed, and the additional costs to process further. In other words, all 175 tons of copper can be sold without further processing for $6,200 per ton or it can be sold for $8,000 per ton if further processed. But to process the entire 175 tons of copper that are in the batch costs an additional $383,000.
Required:
a. Which of the four minerals should be sold unprocessed and which should be processed further and then sold? Provide detailed calculations supporting your recommendations. 384 Chapter 8
b. Based on your decisions in part (a), should Palabora Mining continue to produce batches of the four minerals if each batch costs $680,000? Provide detailed calculations supporting your recommendations.
c. Palabora Mining allocates the $680,000 batch cost to the four minerals based on tons of each mineral in the batch. Prepare a table that allocates the $680,000 batch cost to the four minerals based on tons of each mineral in the batch and the profits (revenues less any costs to process further if the mineral is processed further less allocated batch cost) of each mineral.
d. Which mineral is the most profitable, and which is the least profitable based on your analysis in part (e)?
e. Based on your analyses in parts (a) through (d), what advice would you give to the managers of Palabora Mining regarding processing of each of the four minerals and the current method described in part (c) used to allocate the $680,000 batch cost?
Free
Essay
Q 32Q 32
Sydney Mira
Sydney Mira provides two financial services through two separate operating divisions (O1 and O2). These two operating divisions require the services of three internal service departments (S1, S2, and S3). The costs of the three service departments last month and the use of each service department by the two operating divisions are:
Each service department (S1, S2, and S3) meters the use of its services to other service departments and operating divisions (O1 and O2) in Sydney Mira via "service units." Each of the three service departments has a different method of determining service units it supplies, but collectively all three service departments report service units and these service units are used to allocate the service departments' costs to the users of the service department. For example, service department S1 provided 70 service units to operating division O1 last month.
In addition to providing services to the two operating divisions, O1 and O2, the service departments provide services to the other service departments. The following table summarizes the service units consumed last month by the service departments.
Free
Not Answered
There is no answer for this question
Q 33Q 33
Vista View Wines
Vista View Wines (VVW) is a large vineyard that produces a host of varietal wines (premium reds and whites) and fortified wines. Fortified wines such as brandy, vermouth, sherry, madeira, and port consist of wine with additional distilled products. Besides sourcing grapes for its wines from its own vineyard, VVW purchases grapes from surrounding vineyards. VVW is organized around two profit centers: Wines (all of the premium wines) and Ports (all of the fortified wines). A case of wine or fortified wine is sold as soon as it is produced. Each profit center faces its own demand curve as depicted below, and each profit center has different and distinct marketing and distribution channels. Wines sells its products by private labeling them to hotels, whereas Ports sells its fortified wines to liquor stores.
VVW purchased 5,000 tons of grapes that were then crushed and the juice from the first and second pressings was used by Wines and the juice from the third and fourth pressings was used by Ports. Each subsequent pressing applies more pressure, and the resulting juice contains more impurities. The cost of the grapes (including pressing) amounted to $5 million and these costs are recovered from Wines and Ports using predetermined rates based on the budgeted number of juice gallons used in the cases produced (and sold). Based on their budgeted gallons used and cases produced, Wines is charged $19 per case and Ports $13 per case to recover the grape and pressing costs of $5 million. (Grape and pressing cost is charged to each of the two profit centers.)
In addition to the grape and pressing cost, Wines and Ports incur variable costs to ferment, age, bottle, package, and distribute their products. Wines incurs variable costs of $25 per case and Ports incurs $20 of variable costs per case. Wines and Ports have separate fermenting, packaging, marketing, and distribution channels and incur their own fixed costs ($6.3 million by Wines and $2.8 million by Ports). The managers of Wines and Ports are compensated based on the profits of their individual operation, which is calculated based on their own revenues, variable and fixed costs, and the grape and pressing costs.
Required:
a. How many cases of wines do you expect Wines to produce, and how many cases of fortified wines do you expect Ports to produce?
b. Based on your calculations in part (a), how much profit will Wines and Ports report?
c. If central management has the same knowledge of the demand conditions as Wines and Ports and makes the Wines and Ports price-quantity decisions to maximize firm profits instead of allowing each division to make its own price-quantity decision, would the same price-quantity decisions be made? Justify your answer with supporting calculations and analyses.
d. Explain why your answers in part (a) and (c) are the same or different.
e. Assuming that VVW continues to maintain its decentralized organizational structure and continues to compensate its Wines and Ports managers based on their own profits as described in the problem, what, if any, changes would you recommend VVW make in the way profits of each profit center is calculated?
Free
Not Answered
There is no answer for this question