Exam 7: Assessing and Improving Product Profitability

"Tight but attainable" standards:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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