CHAPTER 10 COST PLANNING FOR THE PRODUCT LIFE CYCLE: TARGET TARGET COSTING, THEORY OF CONSTRAINTS, AND LONG-TERM PRICING QUESTIONS 10-1 A firm has two options for reducing costs to a target cost leve l: a. Reduc Reduce e cost costs s to a targe targett cost cost level level by inte integra grati ting ng new new manu manufa fact cturi uring ng technology, using advanced cost management techniques such as activity-based costing, costing, and seeking seeking higher higher producti productivity vity through through improv improved ed organiza organization tion and labor labor relat relation ions. s. his his meth method od of cost cost reduc reducti tion on is comm common on in specia specializ lized ed equipment manufacturing. b. Reduce cost to a target cost level by redesigning a popular product. his method is the more common of the two, because it recognizes that design decisions account for much of total product life cycle costs !see "#hibit $%-&'. (y careful attention to design, significant reductions in total cost are possible. his approach to target costing is associated associated primarily primarily with )apanese manufacturers, manufacturers, especial especially ly oyota, yota, which which is credited credited with with develop developing ing the metho method d in the mid $*+%s. his method of cost reduction is common in consumer electronics. 10-2
he sales life cycle refers to the phase of the products sales in the market - from introd introduc ucti tion on of the produc productt to decline decline and and with withdra drawa wall from from the mark market et.. n cont contra rast st,, the the cost cost life life cycl cycle e refe refers rs to the the acti activi viti ties es and and cost costs s incu incurr rred ed in developing a product, designing it, manufacturing it, selling it and servicing it. he phases of the sales life cycle are: hase hase /ne: roduc roductt ntr ntrod oduct uction ion.. n the first phase phase there there is little little compet competiti ition, on, and sales sales rise slowly as custome customers rs become become aware aware of the new product. 0osts are relatively high because of high R12 e#penditures and capital costs costs for settin setting g up producti production on facilities facilities and marketi marketing ng effort efforts. s. rices rices are relativ relatively ely high because because of product product differ differenti entiatio ation n and the high costs at this this phase. roduct variety is limited. hase hase wo: wo: 3rowth. 3rowth. 4ales 4ales begin to grow rapidly rapidly and product product variety increases. he product product continues continues to en5oy the the benefits benefits of differentiat differentiation. ion. here is increasing competition and prices begin to soften. hase hree: hree: 6aturity 6aturity.. 4ales continue continue to increase but at a decreasing decreasing rate. rate. here here is a reduction reduction in the number number of competi competitors tors and product product variety variety. rices soften soften further, further, and differentiati differentiation on is no longer important. important. 0ompetitio 0ompetition n is based on cost, given competitive quality and functionality. hase hase 7our: 2ecline. 2ecline. 4ales 4ales begin begin to decline, decline, as does the number number of competitors. rices stabilize. "mphasis on differentiation returns. 4urvivors are able to differentiate their product, control costs, and deliver quality and e#cellent servi service. ce. 0ontr 0ontrol ol of costs costs and and an effe effect ctiv ive e dist distrib ributi ution on netwo network rk are key to continued continued survival.
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10-3
he strategic pricing approach changes over the sales life cycle of the product. n the first phase, pricing is set relatively high to recover development costs costs and to take advantage of product differentiation and the new demand for the product. n the second phase, pricing is likely to stay relatively high as the firm attempts to build profitability in the growing growing market. Alternatively Alternatively,, to maintain or increase market share at this time, relatively low prices !8penetration pricing9' might be used. n the latter phases, pricing becomes more competitive, and target costing and life-cycle costing methods are used, as the firm becomes more of a price factors that make sensitivity sensitivity analysis analysis taker taker rather rather than a At least three factors price setter setter,, and prevalent in decision making including the following price effo effort rts s are are made made to redu reduce ce upst upstre ream am !for !for prod produc uctt enha enhanc ncem emen ents ts'' and and downstream costs.
10-4 At the introduction and into the growth phases, the primary need is for value chain analysis, to guide the design of products in a cost-efficient manner. 6aster budgets !0hapter !0hapter ' are also used in these early phases to manage cash flows; there are large developmental costs at a time when sales revenues are still relativ relatively ely small. small. hen, as the strategy strategy shifts shifts to cost leadership leadership in the latter phases, the goal of the cost management system is to provide the detailed budgets and activity-based costing tools for accurate cost information. 10-5
arget costing is a method by which the firm determines the desired cost for the product, given a competitive market price, so that the firm can earn a desired profit. t is used by several manufacturing firms, particularly in the automotive and consumer products industries, such as
10-6
>ife-cycle costing considers the entire cost life cycle of the product, and thus provides a more complete complete perspective of product costs and product profitability profitability.. t is used to manage manage the total costs of the product across its entire life cycle. 7or e#ample, e#ample, design and development development costs may be increased in order to decrease decrease manufacturing costs and service costs later in the life cycle.
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here are five steps in /0 analysis: 4tep /ne: dentify the 0onstraint ?se a flow diagram. he constraint is a resource that limits production to less than market demand. 4tep wo: 2etermine the 6ost "fficient ?tilization of "ach 0onstraint roduct mi# decision: based on capacity available at the constraint, find the most profitable product mi#. 6a#imize flow through the constraint: -reduce setups -reduce lot sizes -focus on throughput rather than efficiency
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4tep hree: 6a#imize the 7low hrough the 0onstraint 2rum-(uffer-Rope concept: maintain a small amount of work-in-process !buffer' and insert materials only when needed !drum' by the constraint, given lead times !rope'. All resources are coordinated to keep the constraint busy without a build-up of work. 4tep 7our: ncrease 0apacity on the 0onstrained Resource nvest in additional capacity if it will increase throughput greater than the cost of the investment. investment. 2o not move to investment investment until steps two and three are complete, that is, ma#imize the productivity of the process through the constraint with e#isting capacity. capa city. 4tep 4tep 7ive: 7ive: Rede Redesig sign n the the 6anu 6anufa fact cturi uring ng roces rocess s for for 7le# 7le#ibi ibilit lity y and 7ast 7ast hroughput 0onsider a redesign of the product of production process, to achieve faster throughput. /ne could argue that any step could be the most important; for e#ample step one can be considered to be the most important because of the analysis undert undertak aken en is intend intended ed to impro improve ve the the speed speed of produ product ct flow flow throu through gh the the constraint. 10-
/0 emphasizes the improvement of throughput by removing or reducing the !"#$%&'(#%$, !"#$%&'(#%$ , which are bottlenecks in the production process that slow the rate of output. output. hese hese are often identifi identified ed as processes processes wherein wherein relativel relatively y large large amounts of inventory are accumulating, or where there appear to be large lead times. times. ?sing ?sing / /0 0 the manage managemen mentt account accountant ant speeds speeds the flow flow of product product through the constraint, and chooses the mi# of product so as to ma#imize the profitability of the product flow through the constraint.
10-)
he purpose of the flow diagram is to assist the management accountant in the first step of /0, to identify the constraints.
10-10 he methods of product engineering and design in life-cycle costing are: (asi (asic c engi engine neer erin ing g is the the meth method od in which hich prod produc uctt desi design gner ers s work work independ independentl ently y from from market marketing ing and manufa manufactu cturing ring to develop develop a design design from from specific plans and specifications. rototyping is a method in which functional models of the product are developed and tested by engineers and trial customers. emplating is a design method in which an e#isting product is scaled up or down to fit the specifications of the desired new product. 0oncurrent engineering, or 8simultaneous9 engineering, is an important new approach in which product design is integrated with manufacturing and marketing throughout the products life cycle. 10-11 =alue engineering is used in target costing to reduce product cost by analyzing the tradeoffs between different types and levels of product functionality and total product cost. wo common forms of value engineering are: Solutions Manual
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2esign analysis is a process where the design team prepares several possible designs of the product, each having similar features but different levels of performance on these features and different costs. 7unctional analysis is a process where each ma5or function or feature of the product is e#amined in terms of its performance and cost. 10-12 Activity-based costing !A(0' is used to assess the profitability of products, 5ust as is /0. he difference is that /0 takes a short-term approach to profitability analysis, while A(0 develops a longer-term analysis. he /0 analysis has a short-term focus because of its emphasis on materials related costs only, while A(0 includes all product costs. /n the other hand, unlike /0, A(0 does not e#plicitly include the resource constraints and capacities of production operations. hus, A(0 cannot be used to determine the short-term best product mi#. A(0 and /0 are thus complementary methods; A(0 provides a comprehensive analysis of cost drivers and accurate unit costs as a basis for strategic decisions about long-term pricing and product mi#. n contrast, /0 provides a useful method for improving the short-term profitability of the manufacturing plant through short-term product mi# ad5ustments and through attention to production bottlenecks. 10-13 /0 is appropriate for many types of manufacturing, service and not-for-profit firms. t is most useful where the product or service is prepared or provided in a sequence of inter-related activities as can be described in a network diagram such as shown in "#hibit $%-+. he most common users of /0 to date have been manufacturing firms who use it to identify machines or steps in the production process which are bottlenecks in the flow of product and profitability. 10-14 arget costing is most appropriate for firms that are in a very competitive industry, so that the firms in the industry compete simultaneously on price, quality and product functionality. n very competitive markets such as this, target costing is used to determine the desired level of functionality the firm can offer for the product while maintaining high quality and meeting the competitive price. 10-15 >ife-cycle costing is most appropriate for firms which have high upstream costs !i.e. design and development' and downstream costs !i.e. distribution and service costs'. 7irms with high upstream and downstream costs need to manage the entire life cycle of costs, including the upstream and downstream costs as well as manufacturing costs. raditional cost management methods tend to focus on manufacturing costs only, and for these firms, this approach would ignore a significant portion of the total costs.
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10-16 4trategic pricing is used to help a firm develop and implement its strategy for success as its products and services mature in the market place. he focus for new products is typically differentiation and there is a heavy focus on research and development, while cost control becomes more important as the product matures. n contrast, life-cycle costing is used to manage the costs of the product over its entire cost life-cycle - from research and development and product testing to manufacturing and finally distribution and customer service.
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E*ERCISES 10-17T'&+% C"$%(#+ 15 .(#/ $. he unit cost is currently @B.+% C @$&,D$,%%%EF,%%% he current profit per item is @+$% - @B.+% C @+$.B%
hus, the target cost to meet the competitive price is: @% - @+$.B% C @B.+% F. he target cost can probably be achieved by efforts in two areas: a. he standard cost analysis shows an unfavorable materials variance of @%%,%%% !@D,%%%,%%% - @+,%%,%%%' or @F% per unit, a very significant variance. "fforts to reduce or eliminate this variance will make the firm much more competitive. Gotice that the labor usage variance for indirect labor is favorable, and the direct labor variance is unfavorable. t may be that additional work is needed setting the standards. b. he standard cost shows an unfavorable direct labor variance of @$F,%%% !@F,+F,%%% - @F,%%,%%%', or @ per unit, an opportunity for cost savings. c. he remaining manufacturing costs can be considered nonvalue adding costs, since they do not add to the functionality or quality of the product. "fforts can be made to reduce the total cost of these manufacturing costs, which now total a significant @B,%*%,%%% or @$+&.+% per unit.
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10-1 T'&+% C"$%(#+ 30 .(#/
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roblem $%-$ !continued' B. arget costing should be useful to (4 to assist the firm in meeting the new competition by finding new ways to cut costs without reducing product quality or functionality.
Blocher,Chen,Cokins,Lin: Cost Management 3e
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10-1)T I.9'!% " E''%(#+ % L"!' C"#$%&'(#%$ 10 .(#/ 3ordons actions have likely caused the bottleneck to change to another activity. Hhile 3ordon can improve the flow through his own department, without coordination with other departments the constraint will simply move another department. he point is that the theory of constraints must be applied to the entire manufacturing process in an integrated manner . As bottlenecks are discovered and removed, other bottlenecks will appear. he ob5ective of /0 is to improve the flow of product through the factory - to reduce the cycle time and to reduce the accumulation of work-in-process inventory within the factory.
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10-20 P&(!(#+ 25 .(#/ T 9&(!, !"#%&(%("#, '# 9&"(% (#"&.'%("# ($ '$ "";$ otal =ariable 0osts otal 7i#ed 0osts otal 6anufacturing 0ost otal 4elling and Administrative otal >ife 0ycle 0ost er unit 6anufacturing 0ost er unit >ife 0ycle 0ost
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10-21 L( C! C"$%(#+ 20 .(#/ otal 7i#ed 0osts @ F,&%% &,%%% ,B%% +,*F% +,%%% F$,%%% @ BB,+F%
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10-22 S'$ L(-C! A#'$($ 5 .(#/
Activities and 6arket 0haracteristics 2ecline in sales Advertising (oost in production 4tabilized profits 0ompetitors entrance into market 6arket Research 6arket 4aturation 4tart roduction roduct esting ermination of roduct >arge ncrease in sales
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>ife 0ycle 4tage 2ecline ntroduction 3rowth 6aturity 3rowth ntroduction 6aturity ntroduction ntroduction 2ecline 3rowth
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PRO?LEMS 10-23
T'&+% C"$%(#+ (# ' S&(! F(&. 20 .(#/
$. 0? $%% ?nit 0ost Kuantity 0ost =ideo camera @ $% $ @$% =ideo monitor D $ D 6otion detector $ D 7loodlight & FB Alarm $ $ $ Hiring .$%Eft D%% D% nstallation F%Ehr $+ &F% otal @DF*
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0? $%%: !@$% - @DF* total costs'E@ $% C $%I profit margin 0? *%%: !@$,F% - @$,&+$'E@$,F% C $%.B+I profit margin F. 0? $%%: !@D% - @DF* total costs'E @D% C F.I profit margin 0? *%%: !@$,&*% - @$,&+$'E@$,&*% C F.%*I profit margin &. he installation costs are the largest component of cost and this category could have room for improvement. (y redesigning the layout of the systems or finding components that integrate more readily, the installation times could then be reduced. Also, costs could be lowered by contractual bargaining with electricians to reduce the per hour rates for installation. he video equipment and motion detectors are sources of significant costs, but decreasing the quality or quantity of these items would substantially change the effectiveness and value of the security systems.
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10-24 T'&+% C"$%(#+, S%&'%+ 15 .(#/ $. cost per unit C !@F,D%%,%%% J @$,%%%,%%% J @&%%,%%% J @B,%%%,%%%' E $%,%%% C @%% per unit profit per unit C !@D price per unit - @%% cost per unit'C @D
F. 6achine setups do not add value to the tables. @&%%,%%% total cost E $%,%%% units C @&% per unit of non-value added costs &. @%% price per unit - @D profit per unit C @DF per unit target cost B. 0ost must be reduced by @%% - @DF C @D. 7irst and foremost, (enchmark should focus on getting back on budget. nefficiencies in materials usage have led to an e#tra @$.Eunit in cost L M!F,%%%EBF,%%%' # @F,D%%,%%%NE$%,%%% C @$.O. Also, getting labor on budget would save an additional @$Eunit L M@$,%%%,%%% # !,%%%E$%%,%%%'NE$%,%%% O. his would get costs down to @D+*.$F per unit !@%% - @$ - @$.'. art of the additional @BB.$F !@D - @$ - @$.' of savings needed to attain the @DF target cost could come from reducing the non-value added costs from machine setups. his could be done through product design and manufacturing process reengineering. Also, a careful e#amination of mechanical assembly might reveal cost saving opportunities because this category currently comprises half of the cost per unit. 0utting F P hours off of mechanical assembly through product innovation or a process change would provide more than @&% of savings !at @B,%%%,%%%E&F%,%%% C @$F.% per hour; savings of F P hours per unit would save F P # @$F.% C @&$.F per unit'
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1025 T'&+% C"$%(#+ 20 .(#/
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he cost savings of @F$ are not sufficient to get the product total cost !@$,F$%' down to the desired target cost of @$,F%%. 3iven that Gational might be willing to pay a higher price, and since the cost difference is relatively small, it seems that 6orrow should in fact pursue the order.
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P&". 10-25 !"#%(#/
b. 6orrow appears to compete in what Robin 0ooper calls the 8confrontation9 strategy ! When Lean Enterprises Collide,
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10-26 T'&+% C"$%(#+ H'% C'& 20 .(#/
$. he unit cost is @ C @DD,$D,%%E*$,%% he current profit per item is @$$ - @ C @&% he target cost to meet the competitive price is @$%* - @&% C @D*. F. he unit cost is @+.B+ C @&,$%*,%*%E*+$,FD Gote: @DD,$D,%% J !@DD,$D,%%+.I' C @&,$%*,%*% he current profit per item is @$F - @+.B+ C @&.B he target cost is @$FB - @&.B C @.B+ A critical success factor is the relationship with network providers. "stablishing a good working relationship with its providers improves the likelihood that the clinicians will follow the <6/s protocols. 0ustomer satisfaction is essential, so 62 lus should measure and monitor the satisfaction levels of their patients, employees, network providers and referring physicians. 4ince quality of care is a critical component of customer satisfaction, a continuous quality improvement department could be established to monitor the organizations effectiveness and efficiency. 3#
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10-27 T'&+% C"$% @'&"$(#+ 20 .(#/
0urrent Sear /perating ncome 4ales @$% # $%%,%%% C @$,%%%,%%% 0osts: urchase @ # $%%,%%% C @%%,%%% urchasing order @$%% # $,%%% C $%%,%%% Harehousing @F% # ,%%% C $+%,%%% 2istributing @% # %% C B%,%%% 7i#ed operating cost %,%%% %,%%% /perating income @$%,%%% arget 0ost 4ales @$%.%% # $%%,%%% # .*% C @*%%,%%% 2esired profit $%,%%% otal cost allowed @D%,%%% otal costs e#cluding warehousing: urchase @%%,%%% # .* C @B*%,%%% urchasing order @$%% # %% C %,%%% 2istributing @D # %% C &D,%% 7i#ed operating cost @%,%%% +D,%% 6a#imum warehousing cost @ *F,%%
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10-2
T'&+% C"$%(#+ I#%&#'%("#' 20 .(#/ $. arget manufacturing cost C 0urrent manufacturing cost J 8?.4. 2ifferential9 C @+ J rice differential - 0ost differential C @+ J @$+ - @$% C @+F /r: arget cost C target price T differential advertising and shipping T desired ?4 profit @+F C @*% - @$% - @$
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10-30 T"& " !"#$%&'(#%$ 25 .(#/
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&,%%%
&,%%
(y inspection, the constraint is Assembly, where there are F,%%% minutes of time available, but F,*F minutes required, a deficit of *F minutes 4econd: 2etermine the most profitable product mi# PEC-1 @F%% $$% *% B @F.%%
rice 6aterials cost hroughput margin 0onstraint time !min' hroughputEminute
PEC-2 @F% $&D.% $$F.% D @$.%
(ased on the profitability analysis, "0-$ is the most profitable product, given the constraint on Assembly time. 4o the most profitable product mi# is B% units of "0-$ and F units of "0-F: 2emand roduction plan, "0-$ 0onstraint time used, remaining roduction plan, "0-F otal hroughput
PEC-1 B% B% B%#BC$,%%
F,%%% -$,%%CF%%
B% # @*% C @&,+%%
F%%EDCF.++D; round to F F # @$$F.% C @FF.%%
Blocher,Chen,Cokins,Lin: Cost Management 3e
10-22
PEC-2 $
©The McGraw-Hill Co!anies, "nc#, 200$
10-31 T"& " C"#$%&'(#%$ 30 .(#/ P'&% O#: I#%( % C"#$%&'(#%
otal ime Required for "ach activity for 3iven 2emand able 0ut 4and Assemble 4tain 0ut 7abric
4ofa $% $% &%% $F% %
otal ime &+ *% &$ *% *%
$+ FB% +$ F$% *%
ime 4lack Available ime F% *B F% B% D%% $B% -D% $B% %
P'&% T;": I#%( M"$% P&"(%' P&"!%
rice 6aterials 0ost hroughput 6argin 0onstraint time hroughputEtime
able @ &%% $%% @ F%% %.B @ %%
4ofa @ % F% @ &%% %. @ +%%
P'&% T&: I#%( M"$% P&"(%' P&"!% M(D
able 2emand ?nits of roduct !see note' hroughputEtime otal hroughput
@ @
4ofa &%% $% $F $% %% @ +%% +F,%% @ $%,%%%
Gote: 4ofas are most profitable and go first; total time for sofas C $% # . C *%hrs; otal hours available for ables C $B%-*% C % hours; total tables that can be manufactured C %E.B C $F tables.
Solutions Manual
10- 23
P&". 10-31 !continued'
F. art one above solves the first two steps of the /0, to identify the constraint and determine the most profitable product mi#. he third step, to ma#imize flow through the constraint, would require
Blocher,Chen,Cokins,Lin: Cost Management 3e
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©The McGraw-Hill Co!anies, "nc#, 200$
10-32 T"& " C"#$%&'(#%$ 30 .(#/
Hith the information available 2on can complete the first two steps of /0 as shown below. he analysis shows that the reactor process is the constraint, and that in the short run, olymer $ is the most profitable product. he most profitable product mi# is +% units of olymer $ and F units olymer F. ?ntil the production delays can be dealt with !/0 steps &-', 2on should advise 0 to meet all the sales demand of olymer $ and to advise customers of olymer F there would be some delays in the shortTterm. hen, 0 should work quickly to relieve the constraint, reactor time, by applying the third, fourth and fifth /0 steps. Hithout specialized technical knowledge of the manufacturing processes in this industry, one can only speculate about what these steps might be. F(&$%: I#%( % C"#$%&'(#% otal ime Required for "ach activity for 3iven 2emand ime Required for otal olymer $ olymer F ime
7iltering +%#FC $F% 4tripper +%#!$J$'C $F% Reactor +%#&C $% 7inal 7ilter +%#FC $F% 6i#ing +%#&C $%
B%#!FJF'C $+% B%#!FJ$'C $F% B%# C F%% B%# $ C B% B%#& C $F%
F% FB% &% $+% &%%
ime 4lack Available ime &F% &F% &F% $+% &F%
he reactor is the constraint , since there is a demand of &% hours but only &F% hours available.
Solutions Manual
10- 2$
B% % -+% % F%
P&". 10-32 !continued' S!"#: I#%( M"$% P&"(%' P&"!%
olymer $ rice 6aterials 0ost hroughput 6argin 0onstraint time hroughputEtime
@ $% B @ +% & @ F%
olymer F @ $% +% @ *% @ $
T(&: I#%( M"$% P&"(%' P&"!% M(
?nits Lfor olymer F; F units C !&F% - +%#&'EO 0ontributionE?nit otal contribution
Blocher,Chen,Cokins,Lin: Cost Management 3e
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olymer $ olymer F +% F @+% @&,+%%
@*% @ F,F%
©The McGraw-Hill Co!anies, "nc#, 200$
10-33 T"& " C"#$%&'(#%$ 30 .(#/
$. (akker will not be able to meet the demand. 2epartment $ is a constraint, based on machine time. He do not consider labor time because (akker is able to hire and retain all the labor it needs. $ 6achine
F $,%%%C %%#F B%%C B%%#$ F,%%%C $,%%%#F &,B%% &,%%% !B%%'
2epartments & %%C %%#$ B%%C B%%#$ F,%%%C $,%%%#F F,*%% &,$%% F%%
B
$,%%%C %%#F %
$,%%%C %%#F %%C B%%#F $,%%%C $,%%%#$ F,%% &,&%% %%
$,%%%C $,%%%#$ F,%%% F,D%% D%%
2# The *est !ro+uct i is %00 units o .ro+uct &13, $00 units o !ro+uct &11, an+ (00 units o !ro+uct &1$#
611
613
rice @$*+ @$F& =ariable 0ostV $%& D& hroughputEunit @*& @% 6achine hours in 2ept $ F $ hroughputEhour @B+.% @%.%% V 7or e#ample, variable cost for +$$ C @!DJ$FJF$JFBJ*JFDJ&'
615
@$+D *D @D% F @&.%%
roductionEsales lan 7irst: 4econd:
otal hours available in 2ept $ B%% units of +$&; B%%#$ hours %% units of +$$; %%#F hours
$,+%% hird: %% units of +$; $,+%%EF hours per unit C %% All &,%%% hours used
Solutions Manual
10- 2'
&,%%% B%% $,%%%
10-34
L(-C! C"$%(#+ E%(!$ 25 .(#/ $. Haters analysis based on the prepared report fails to consider the very significant amount of research and development and selling costs. t is unlikely that the two products consumed equal shares of these costs. As the calculations in part F below illustrate, the determination of profitability can be significantly affected by the tracing of these non-manufacturing costs each product. he idea is that lifecycle costing, including upstream and downstream costs !research and development, and selling costs, respectively' as well as the manufacturing costs, is necessary to get an accurate picture of each products overall profitability.
F. 4ales 0ost of goods sold 3ross profit Research and dev. 4elling e#penses rofit before ta#es Return on 4ales
derm @&,%%%,%%% $,*%%,%%% @$,$%%,%%% !DF%,%%%' !%,%%%' @&%%,%%%
Sderm @F,%%%,%%% $,+%%,%%% @ B%%,%%% !$%,%%%' !F%,%%%' @ F%%,%%%
otal @,%%%,%%% &,%%,%%% @$,%%,%%% !*%%,%%%' !$%%,%%%' @ %%,%%%
@&%%,%%% @&,%%%,%%% C $%I
@ F%%,%%% @F,%%%,%%% C $%I
@ %%,%%% @ ,%%%,%%% C$%I
he life-cycle product line profitability analysis shows a much different result. &.Gow, the two products have the same return on sales. his illustrates that including the upstream and downstream costs can be very important in getting a useful analysis of product profitability. 7ailing to include these non-manufacturing costs, as Haters did at first, may lead to incorrect marketing and management decision making, as the firm may have a biased and incorrect idea of the most profitable product!s'.
Blocher,Chen,Cokins,Lin: Cost Management 3e
10-2(
©The McGraw-Hill Co!anies, "nc#, 200$
10-35 L( C! C"$%(#+ 25 .(#/ $.
rice and ?nits for each sales prediction, B years Gotes rice @$% @$% @FF ?nits %,%%% +%,%%% B,%%% for B years Revenue
/perating rofit for each price !all figures in @%%%' @$F,%%% @$%,%% @$%,%%
0ost R12 rototyping 6anufacturing 7i#ed =ariable 6arketing 7i#ed =ariable 0ustomer 4vc 7i#ed =ariable 2istribution 7i#ed =ariable otal 0osts /perating rofit
@B%% %%
@B%% %%
@%% more at the @FF price $,F%% more at the @FF price
$,F%% $,+%%
$,F%% $,F%%
DF% B%%
*+% &%%
*+% less at the @$% price FB% @ per unit
$BB +B%
$BB B%
$+ more at the @FF price &B @ per unit
FB% $,F%%
FB% *%%
D,&BB @B,++
+,+FB @B,$D+
$,F%% @F,%%% # $F # B *+% @F% per unit
FB% @,%%% # $F # B *+% @$ per unit !@F% at the @FF price' +,$F @&,*
F. he @$% price provides the highest e#pected profit.
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10-36 L(-C! C"$%(#+ 25 .(#/
$. A product life-cycle statement would aggregate the three years into one show the totals in each category for the 8life9 of the product. F. >% appears be more profitable; DD$ vs +D% life cycle profits. >B% Revenues 0osts Research and 2evelopment rototypes 6arketing 2istribution 6anufacturing 0ustomer 4erivce otal 0ost
2001
@
:%%
$,B%% &% +% +% F% $,:*%
/perating 6argin
>% Revenues 0osts Research and 2evelopment rototypes 6arketing 2istribution 6anufacturing 0ustomer 4erivce otal 0ost
2002
@
@
&,$%%
-
BD $&% $,&% : F,%B%
$,B%% B%% $,$& &$% F,$B% $B ,&%
$,%+%
+D%
!$,%*%'
D%%
2001
@
*%%
+% &%% $FB $D% : $,&F*
/perating 6argin
2002
@
!BF*'
$,*%%
&% F%% F%% D%% F% $,$% D%
@
2003
@
-
T"%'
F,&%%
% +%% $F% DD% +% $,+%%
2003
F,F%%
+,F%%
T"%'
@
,%%%
$% F+% B$% DD% &%% $,D%
+% &B% :B D:% $, &F% B,FF*
B%
DD$
Gote however, that the trend in sales and profits is much more favorable for >B%. >%s life cycle profits are low primarily because of high development costs in F%%$.
Blocher,Chen,Cokins,Lin: Cost Management 3e
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©The McGraw-Hill Co!anies, "nc#, 200$
P&". 10-36 !"#%(#/
&. >B% Revenues 0osts Research and 2evelopment rototypes 6arketing 2istribution 6anufacturing 0ustomer 4erivce otal 0ost
2001
@
/perating 6argin
>% Revenues 0osts Research and 2evelopment rototypes 6arketing 2istribution 6anufacturing 0ustomer 4erivce otal 0ost /perating 6argin
2002
:%% I @ % $,B%% DB.$I &% $:.I +% &.FI +% &.FI F% $.$I %.%I $,:*% !$,%*%'
2001
@
*%%
+% &%% $FB $D% : $,&F*
F,&%% I % % +%% $F% DD% +% $,+%%
2003
@ %.%I &.$I &D.I D.I B:.$I &.:I
D%%
$,%+%
2002
@ B:.*I FF.+I *.&I $F.:I +.BI %.%I
!BF*'
$,*%% % &% F%% F%% D%% F% $,$% D%
&,$%% I % %.%I %.%I BD F&.&I $&% +.BI $,&% ++.FI : B.FI F,%B%
2003
@ %.%I F.+I $D.BI $D.BI +%.*I $.DI
F,F%% % $% F+% B$% DD% &%% $,D% B%
he analysis shows how the distribution of costs for both products shifts from research and development in the first year to manufacturing and customer service in the last year. he shift is most pronounced for >B% which has high development costs.
Solutions Manual
10- 31
%.%I %.+I $B.*I F&.BI BB.%I $D.$I
10-37 L( C! C"$%(#+ H'% C'& D($!"#%(#+ 30 .(#/
f 0ure-all were to manufacture the drug themselves, at a sales price of @F& the life-cycle costs would be the following: rice @F& ?nits 4old &,%%%,%%% Revenues @D%,%%%,%%% 0osts R12 0linical rials 6anufacturing 7i#ed =ariable ackaging 7i#ed =ariable 2istribution 7i#ed =ariable Advertising 7i#ed =ariable otal 0ost
@$,%%%,%%% @F,$%,%%% @,%%%,%%% # C @F,%%%,%%% @+#&,%%%,%%% C @F%B,%%%,%%% @&%,%%% # C@$,*%%,%%% @F% # &,%%%,%%% C @+%,%%%,%%% @$,$F,%%% # C @,+F,%%% @+.% # &,%%%,%%%C @$*,%%,%%% @F,F%,%%% # C @$$,B%%,%%% @$F # &,%%%,%%%C @&+,%%%,%%% @&++,&&,%%%
/perating ncome
Blocher,Chen,Cokins,Lin: Cost Management 3e
@&&,B+D,%%%
10-32
©The McGraw-Hill Co!anies, "nc#, 200$
P&". 10-37 !continued'
/utsourcing the manufacturing would result in the following life cycle costs assuming the cost as @F& per unit and the changes in the manufacturing costs: rice ?nits 4old Revenues 0osts R12 0linical rials 6anufacturing 7i#ed =ariable ackaging 7i#ed =ariable 2istribution 7i#ed =ariable Advertising 7i#ed =ariable otal 0ost
@F& &,%%%,%%% @D%,%%%,%%% @$,%%%,%%% @F,$%,%%% @$,%%,%%% # C@D,%%,%%% @% # &,%%%,%%%C @FB%,%%%,%%% @&%,%%% # C @$,*%%,%%% @+%,%%%,%%% @$,$F,%%% # C@,+F,%%% @$*,%%,%%% @F,F%,%%% # C@$$,B%%,%%% @&+,%%%,%%% @&,%&&,%%%
/perating ncome
@&$*,*+D,%%%
/utsourcing the manufacturing results in a lower operating income than manufacturing the drug themselves.
Solutions Manual
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P&". 10-37 !continued'
t appears that selling the drug patent is the best alternative since receiving @BF,%%%,%%% !@&%%,%%%,%%% J @F,%%%,%%% # ' over the five year period is greater than the operating incomes of both the other options.
Blocher,Chen,Cokins,Lin: Cost Management 3e
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©The McGraw-Hill Co!anies, "nc#, 200$
10-3
M'#'!%&(#+ C! E(!(#! 15 .(#/
60" C total processing timeEtotal cycle time C F&E!F&J&J+J&J$JJFJ+JF' C F&E$ C BI Gote that new product development time and order taking time are not considered part of the manufacturing cycle and are e#cluded from cycle time. he level of 60" is best interpreted by reference to the prior 60" values for the firm or to an industry average. A number closer to one is better. Hhen comparing to an industry average, management should make sure that the measures are calculated in the same manner. n this case, Haymouth has improved significantly on its 60" relative to the prior data, and is higher than the industry average.
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10-3)C"#$%&'(#% A#'$($ F"; D('+&'. A99#(/ 60 .(#/
3race =anders accelerated delivery schedule is unsatisfactory in cutting $% days from the total pro5ect schedule because not all of her crashed activities are included on the critical path. n order to reduce the completion time for a pro5ect, activities along the critical path need to be chosen to be crashed or reduced. =anders selection of activities 7), "7, and (3, which are on the critical path A(3"7)U, will reduce total pro5ect completion time only by three days but her selection of activities <), 3<, 02, and 2" have no impact on the critical path. 1#
F. (elow is a revised accelerated delivery schedule that meets both ob5ectives: !$' delivery of the first plane two week !$% working days' ahead of schedule, and !F' at least incremental cost to 0oastal. All the paths need to be evaluated when reducing a pro5ects completion time.
as e+uce+
1 1 1 2 % 1 2
"ncreental Cost !er +a 8 %00 (00 )00 1,000 1,200 1,300 '00
"ncreental Cost
8 %00 (00 )00 2,000 %,(00 1,300 1,%00 811,&00
/BG4567
/BGH67
/B4567
/BC4567
&$ &% &3 &2 &0 $& $$ $$
$3 $3 $3 $2 $0 %& %$ %$
%$ %% %3 %2 %2 3( 3( 3(
&% &3 &2 &1 &1 $' $' $$
&. he total incremental costs (ob eterson will have to pay for this revised accelerated delivery schedule amount to @$$,+%%, or a new total pro5ect cost of @D+,D%% from the original @+,$%%, and a saving of $% days.
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10-40 P&"!%("# P'##(#+ '# C"#%&" 30 .(#/
here may be a happy ending to this story if Uristen and (ryan change the focus in the plant from productivity at each work station and meeting budgets to a focus on speed and throughput. he current emphasis on productivity at each work station has the effect that each employee has the incentive to work very hard to meet their productivity targets, without a consideration of the overall productivity of the entire plant. his is why work-in-process inventory builds up in places. 4ome operators are keen on moving the product through their work stations, and not concerned about what happens to it downstream. Also, the emphasis on meeting cost budgets !as in the case of the purchasing department manger', creates incentives to reduce costs in ways which can cause delays and defective products. he purchase of discounted material which apparently led to product defects is an e#ample. he emphasis on individual productivity has other effects. 4ince it creates a focus only on moving product through individual processes, inadequate attention appears to be given to equipment maintenance or to the prevention of defects. here is insufficient attention to preventing quality defects. n contrast, there is e#cessive attention to correcting defects !re-work'. o speed up the process, the rate of defects has to be reduced. he emphasis on correcting defects merely slows things down. 4i#-sigma firms such as oyota and 3" have learned it is less costly as well as faster to prevent defects rather than to spend time on inspection and re-work. nspection and re-work are non-value adding processes that should be eliminated. Another unfortunate result of the cost allocation method in the plant is that department managers apparently have the incentive to reduce the amount of space in which they operate in order to reduce the overhead costs allocated to them. his means that some work stations, for e#ample "ds, are possibly too small for efficient processing, leading to lower productivity and increased defects. Again, the focus of the accounting system has set things awry, and provided a dysfunctional incentive.
Solutions Manual
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