Question: Marti Meyers, vice president of marketing for
Marti Meyers, vice president of marketing for LaserFlo, was concerned as she reviewed the costs for the AP2000 laser printer she was planning to launch next month. The AP2000 is a new commercial printer that LaserFlo designed for medium-size direct mail businesses. The basic system price was set at $74,500; the unit manufacturing cost of the AP2000 is $46,295, and selling and administrative cost is budgeted at 33 percent of the selling price. The maintenance price she planned to announce was $85 per hour of LaserFlo technician time. While the $74,500 base price is competitive, $85 per hour is a bit higher than the industry average of $82 per hour. However, Meyers believed she could live with the $85 price. She is concerned because she has just received a memo from the Field Service organization stating that it was increasing its projected hourly charge for service from $35.05 to $38.25.
The $85 price Meyers was prepared to charge for service was based on last year’s $35.05 service cost. She thought that using last year’s cost was conservative since Field Service had been downsizing and she expected the cost to go down, not up. The $35.05 cost still did not yield the 60 percent margin on service that was the standard for other LaserFlo printers, but Meyers had difficulty justifying a higher maintenance price given the competition. With a service cost of $38.25, Meyers knows she cannot raise the price to the customer enough to cover the higher costs without significantly reducing sales. Given the higher cost of the LaserFlo field technicians and the prices charged for maintenance by the competition, she will not be able to make the profit target in her plan.
Background
LaserFlo manufactures, sells, and services its printers throughout the United States using direct sales and service forces. It has been in business for 22 years and is the largest of three manufacturers of high-speed laser printers for direct mailers in the United States. LaserFlo maintains its market leadership by innovating new technology. Direct mail marketing firms produce customized letters of solicitation for bank credit cards, real estate offers, life insurance, colleges and universities, and magazine giveaway contests. Personalized letters are printed on high-speed printers attached to computers that have the mailing information. The printers print either the entire letter or the address and salutation (“Dear Mrs. Jeremy McConnellâ€) on preprinted forms. Direct mail firms have computer systems to manage their address lists and mailings, and LaserFlo printers are attached to the client’s computer system.
Direct mail laser printers process very high volumes; a single printer commonly addresses 75,000 letters a day. Hence, LaserFlo printers for direct mail marketers differ from general-purpose high-speed printers. In particular, they have specialized paper transfer mechanisms to handle the often custom, heavy paper; varying paper sizes; and high-speed paper flows. With such high paper flow rates, these printers require regular adjustments to prevent paper jams and misalignments. LaserFlo’s nationwide field service organization of about 500 employees maintains these printers.
The standard LaserFlo sales contract contains two parts: the purchase price of the equipment and a maintenance contract for the equipment. All LaserFlo printers are maintained by LaserFlo field service personnel, and the maintenance contract specifies the price per hour charged for routine and unscheduled maintenance. Most of LaserFlo’s profits come from printer maintenance. Printers have about a 5 to 10 percent markup over manufacturing and selling cost, but the markup on maintenance has historically averaged about 60 percent.
LaserFlo printers have a substantial amount of built-in intelligence to control the printing and for self-diagnostics. Each printer has its own microcomputer with memory to hold the data to be printed. These internal microcomputers also keep track of printing statistics and can alert the operator to impending problems (low toner, paper alignment problems, form breaks). When customers change their operating system or computer, this often necessitates a LaserFlo service call to ensure that the new system is compatible with the printer. The standard service contract calls for normal maintenance after a fixed number of impressions (pages); for example, the AP2000 requires service after every 500,000 pages are printed. Its microcomputer is programmed to call LaserFlo’s central computer to schedule maintenance whenever the machine LaserFlo organization
LaserFlo is organized into engineering, manufacturing, marketing, field service, and administration divisions. Engineering designs the new printers and provides consulting services to marketing and field service regarding system installation and maintenance. Engineering is evaluated as a cost center.
Manufacturing produces the printers, which are assembled from purchased parts and subassemblies. LaserFlo’s comparative advantage is quality control and design. Manufacturing also provides parts for field service maintenance. Manufacturing is treated as a cost center and evaluated based on meeting cost targets and delivery schedules. Manufacturing’s unit cost is charged to marketing for each printer sold.
Marketing, a profit center, is responsible for designing the marketing campaigns, pricing the printers, and managing the field sales staff. LaserFlo sells six different printers; each has a separate marketing program manager. The six marketing program managers report to Marti Meyers, vice president of marketing, who also manages field sales.
Field sales is organized around four regional managers responsible for the sales offices in their region. Each of the 27 sales offices has a direct sales force that contacts potential customers and sells the six programs. Salespeople receive a salary and a commission depending on the printer and options sold. The salesperson continues to receive commissions from ongoing revenues paid by the account for service. Since ongoing maintenance forms a significant amount of a printer’s total profit, the salesperson has an incentive to keep the customer with LaserFlo.
Field service contains the technical people who install and maintain the printers. Headed by Phil Hansen, vice president of field service, field service usually shares office space with field sales in the cities where they operate. Field service is a cost center, and its direct and indirect costs are charged to programs when the printers are serviced. The price charged is based on the budgeted rate set at the beginning of the year. Any difference between the actual amount charged to the programs and the total cost incurred by the field service group is charged to a corporate overhead account, not to the marketing programs.
Administration manages human resources, finance, accounting, and field office leases. It handles customer billing and collections, payroll, and negotiating office space for the field sales and field service people. Administration is evaluated as a cost center. While local office space is managed by administration, the cost of the office space is allocated to the field sales and service groups and included in their budgets and monthly operating statements.
Service contracts
Each LaserFlo printer sold requires a service contract. The AP2000’s service contract calls for normal maintenance every 500,000 pages at a price of $0.51 per 1,000 pages. Normal maintenance requires three hours. The typical AP2000 prints 12 million pages per year. Besides normal maintenance (sometimes called preventive maintenance), unscheduled maintenance occurs due to improper operator setups, paper jams, system upgrades, and harsh usage of the equipment. Past statistical studies have shown that each normal maintenance hour generates 0.50 unscheduled maintenance hours. Unscheduled maintenance is billed to the customer at the service contract rate of $85 per hour.
When maintenance is performed on a particular machine, the service revenues less field service costs are credited to the marketing manager for that program. All the programs’ actual service profits are compared with the plan; they form part of Meyers’s performance evaluation. The field salesperson receives a commission based on the total service revenue generated by the account. In evaluating each new printer program, LaserFlo uses the following procedure. Profits from service are expected to create an annuity that will last for five years at 18 percent interest. To evaluate a proposed new printer, the one-year maintenance profits are multiplied by 3.127 to reflect the present value of the future service profits each printer is expected to generate over its life (about five years).
Parts
Any parts used during service are charged directly to the customer and do not flow through field service budgets or operating statements. LaserFlo purchases most of the printers’ parts from outside suppliers, and the customer pays only a token markup. Marketing does not receive any revenue, nor is it charged any costs when customers use parts in the service process. The reason for not charging customers a larger markup on parts stems from an antitrust case filed against LaserFlo and other printer companies six years ago. A third-party service company, Servwell, sued the printer manufacturers for restraint of trade, claiming they prevented Servwell from maintaining the printers by only selling replacement parts at very high prices. To prevent other such claims, LaserFlo sells parts at a small markup over costs. Yet Servwell and other third-party service firms have never been able to penetrate LaserFlo’s service markets because laser printing technology changes rapidly, and an outside company cannot keep a work force trained to fix the latest products. Besides, each printer usually has at least two engineering modifications each year to fix problems or upgrade the printer or its microcomputer hardware and/or software. An outside service company cannot learn of these changes and provide the same level of service as LaserFlo.
Recent changes in field service
LaserFlo field service had two types of technicians: Tech1 and Tech2. Both were trained to repair electromechanical problems, but Tech2s had more training in electronics and computers to work on the latest, most sophisticated printers.
Field service had been trying to reduce the size of the service force the last few years through voluntary retirements and attrition. As the printers became more sophisticated, they became more reliable. The newer systems had self-diagnosing software that allowed a service technician to call up a customer’s printer and run a diagnostic program. Often the problem was solved over the phone line by having a LaserFlo technician make the repair in the software. If a mechanical problem was detected, the technician dispatched a repair person (often a Tech1) with the right part. Also, past customers replaced their older printers with newer ones that required less maintenance. The result was excess capacity in the field staff.
The voluntary retirements over the past few years did not produce the reductions necessary to eliminate the excess capacity. In 2010, field service went through a very large involuntary reduction of its workforce. Through attrition, early retirements, and terminations, LaserFlo reduced the number of technicians by 75, down to 500 budgeted for 2011. The company simultaneously improved the skill level of its remaining field force substantially.
AP2000 sales plan for 2011
Marti Meyers’s 2011 sales plan for the AP2000 calls for 120 placements this year and a programprofit projection of about $2.5 million based on capitalizing the service income using the 3.127 annuity factor. If she were to raise the service price much above $0.51 per 1,000 pages, LaserFlo would lose sales, which are already ambitious. She called Phil Hansen and raised her concerns with him.
“Phil,†she began, “explain to me how you downsized your field personnel, cut some office locations, consolidated inventories, and reduced other fixed costs, yet the price I’m being charged for service increased from $35.05 per hour to $38.25. I thought the whole purpose of the field service reorganization was to streamline and make us more cost competitive. You know that our service costs were out of line with our competitors’. We were planning to charge $85 an hour for the AP2000 service contract. Even at $85 per hour, I would be violating the corporate policy of maintaining a 60 percent markup on service. If I were to follow the 60 percent rule, I would have to charge $87.63 per hour if you had kept your cost to me at $35.05. But with your cost of $38.25 and my price at $85, the margin falls to 55 percent. I already had to get special permission to lower the margin to 59 percent with $35.05.â€
Hansen replied, “Well, there are a number of issues that you’ve just raised. Let me respond to a
few over the phone now and suggest we meet to discuss this more fully next week when I’m back in the office. In the meantime, I’ll send you our projected budget for next year that derived the $38.25 rate. Regarding the key question as to how our hourly rate could go up after downsizing, it’s really quite simple. We had a lot of idle time being built into the numbers. People just pretended to be busy. Had we not downsized, the hourly charge would have gone up even more than it did. For example, on the AP2000 that you mentioned, we would have used 3.25 hours per normal servicing had we kept our labor force mix of Tech1s and 2s the same as in 2010. Had we not downsized, our fixed costs in 2011 would have remained the same as they were in 2010, and our variable costs for Tech1s and 2s would have increased to the 2011 amounts because of wage increases and inflation. Let me get you our numbers so you can see for yourself how much progress we’ve been making.†That afternoon, Meyers received a fax from Hansen’s office (see Table 1). In trying to decide how to proceed, Meyers would like you to address the following questions:
a. Calculate the projected five-year profits of an AP2000 using first the $35.05 and then the $38.25 service cost.
b. Why did the field service hourly cost increase? What caused the hourly rate to go from $35.05 to $38.25?
c. Did the reorganization of field service reduce the cost of servicing the AP2000? Calculate what the total annual service cost of the AP2000 would have been had the reorganization not occurred.
d. Identify the various options Meyers has for dealing with the service cost increase and analyze them.
e. Why does LaserFlo make more money on servicing printers than selling them? Does such a policy make sense?
Transcribed Image Text:
TABLE 1 Field Service Projected Hourly Rate for 2011 Variable Costs Techl Salary & benefits Number $ 42,800 x 175 Total direct cost of Techl Tech2* $ 7,490,000 Salary & benefits Number S 54,800 X 325 Total direct cost of Tech2 $17,810,000 Total variable cost $25,300,000 Fixed Costs Supervision Occupancy costs S1,475,000 1,864,000 Utilities 772,000 Insurance 368,000 Other 56,000 Total Fixed Cost $ 4,535,000 Total cost $29,835,000 Number of Techl 175 Number of Tech2 325 Total technicians 500 Number of technician months 6,000 Average number of billable hours per month per technician Protected number of billable hours 130 780,000 Cost per hour projected for 2011 $38.25 Note: Cost per hour in 2010 $35.05 *300 Techls in 2010 with salary & benefits of $40,100. 1275 Tech2s in 2010 with salary & benefits of $52,900. Same in 2010.
> Joe Bell, president and chief executive officer of Dyna Golf, has called a meeting of the executive committee of his board of directors. He is concerned about the price competition and declining sales of his golf wedge line of business. Bell summarizes t
> British Airways (BA) has implemented the balanced scorecard. Match the following performance indicators: Return on invested capital …….………..……On-time arrivals Earnings growth ……………………….…………Percent empty seats Lost baggage ……………………………………….Employee turnove
> Royal Holland is a cruise ship company. It currently has six ships and plans to add two more. It offers luxury passenger cruises in the Caribbean, Alaska, and the Far East. Management is currently addressing what to do with an existing ship, the S.S. Ams
> Magnetic resonance imaging (MRI) is a noninvasive medical diagnostic device that uses magnets and radio waves to produce a picture of an area under investigation inside the body. A patient is positioned in the MRI and a series of images of the area (say,
> 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 &aci
> Vorma manufactures two proprietary all-natural fruit antioxidant food additives that are approved by the U.S. Food and Drug Administration. One is for liquid vitamins (LiqVita) and the other is used by dry cereal producers (Dry). Both of these products a
> Cogen’s Turbine Division manufactures gas-powered turbines for generating electric power and hot water for heating systems. Turbine’s variable cost per unit is $150,000 and its fixed cost is $1.8 million per month. It
> Adrian Power manufactures small power supplies for car stereos. The company uses flexible budgeting techniques to deal with the seasonal and cyclical nature of the business. The accounting department provided the accompanying data on budgeted manufacturi
> The city of Toledo has received a proposal to build a new multipurpose outdoor sports stadium. The expected life of the stadium is 20 years. It will be financed by a 20-year bond paying 8 percent interest annually. The stadium’s primary tenant will be th
> CJ Equity Partners is a privately held firm that buys small family-owned firms, installs professional managers to run the firms, and then sells them 3–5 years later, often for a substantial profit. CJ Equity is owned by four partners wh
> Wine Distributors is a wholesaler of wine, buying from wineries and selling to wine stores. Three different white wines are sold: Chablis, Chardonnay, and Riesling. Here are budgeted and actual sales data for the month of April. Required: Write a short m
> a. What is the difference between budget lapsing and line-item budgets? b. What types of organizations would you expect to use budget lapsing? c. What types of organizations would you expect to use line-item budgets?
> Winter Games manufactures a competitive line of skis and sells its skis to retailers at a price of $225 per pair. Based on an annual volume of 5,000 pairs, the cost per pair is $185: Sports Palace, a discount sporting goods store, currently purchases 500
> Employee bonuses at American InterConnect (AI), a large communications firm, depend on meeting a number of targets, one of which is a revenue target. Some bonus is awarded to the group if it meets or exceeds its target revenue for the year. The bonus is
> Using your knowledge of the relationship between inflation and nominal interest rates, and assuming that the savings were invested in government bills, comment briefly on the analysis presented in the following letter from the National Taxpayers Union: D
> Allied Adhesives (AA) manufactures specialty bonding agents for very specialized applications (electronic circuit boards, aerospace, health care, etc.). AA operates a number of small plants around the world, each one specializing in particular products f
> Home Auto Parts is a large retail auto parts store selling the full range of auto parts and supplies for do-it-yourself auto repair enthusiasts. The store is arranged with three prime displays in the store: front door, checkout counters, and ends of aisl
> a. Scottie Corporation has been offered a contract to produce 100 castings a year for five years at a price of $200 per casting. Producing the castings will require an investment in the plant of $35,000 and operating costs of $50 per casting produced. Fo
> Thermalloy makes extruded aluminum heat sinks that are small devices that help cool semiconductors and printed circuit boards. Thermalloy uses an absorption costing system whereby all fixed and variable manufacturing overhead is absorbed to manufactured
> Jan Vanderschmidt was the founder of a successful chain of restaurants located throughout Europe. He died unexpectedly last week at the age of 55. Jan was sole owner of the company’s common stock and was known for being very authoritarian. He made most o
> Tagway 4000 is a computer manufacturer based in Montana. One component of the computer is an internal battery that keeps track of the time and date while the computer is turned off. Tagway produces the batteries in-house. The division that produces the b
> Betterton Corporation manufactures automobile headlight lenses and uses a standard cost system. At the beginning of the year, the following standards were established per 100 lenses (a single batch). Expected volume per month is 5,000 direct labor hours
> Ed Koehler started Great Southern Furniture five years ago to assemble prefabricated bedroom furniture for large hotel chains. Hotels purchase furniture (beds, night stands, and chests of drawers) from manufacturers who ship the furniture to the hotels u
> You work in the Strategy Analysis department of On-Call, a worldwide paging firm offering satellite based digital communications through sophisticated pagers. On-Call is analyzing the possibility of acquiring AtlantiCom, an East Coast paging firm in Main
> Amy Laura is opening a snowboard rental store. She rents snowboards for skiing on a weekly basis for $75 per week including the boots. The skiing season is 20 weeks long. Laura can buy a snowboard and boots for $550, rent them for a season, and sell them
> PortCo Products is a divisionalized furniture manufacturer. The divisions are autonomous segments, each responsible for its own sales, costs of operations, working capital management, and equipment acquisition. Each division serves a different market in
> A company makes DVD players and incurs a variety of different costs. Place a check in the appropriate column if the cost is a product cost or a period cost. Further, classify each product cost as direct materials, direct labor, or manufacturing overhead.
> Coase Farm grows soybeans near property owned by Taggart Railroad. Taggart can build zero, one, or two railroad tracks adjacent to Coase Farm, yielding a net present value of $0, $9 million, or $12 million. Value of Taggart Railroad
> Picture Maker is a freestanding photo kiosk consumers use to download their digital photos and make prints. Shashi Sharma has a small business that leases several Picture Makers from the manufacturer for $120 per month per kiosk, and she places them in h
> Goodstone Tires designs, manufactures, and sells automotive tires through three profit centers (divisions): Passenger Vehicles, Industrial Vehicles, and Racing. The Racing Division develops state-of the-art high-performance racing tires for NASCAR, grand
> Taylor designs and manufactures high-performance bicycle chains for professional racers and serious amateurs. Two new titanium chain sets, the Challenger and the Tour, sell for €110 and €155, respectively. The following
> Howard Binding manufactures two types of notebooks: large and small. The large and small notebooks are made of the same cloth cover (direct materials) but in different quantities. The standard cost sheet for each follows. At the beginning of the month, t
> The following figures were taken from the records of Wellington Co. for the year 2008. At the end of the year, two jobs were still in process. Details about the two jobs include: Wellington Co. applies overhead at a budgeted rate, calculated at the begin
> An investment under consideration has a payback of five years and a cost of $1,200. If the required return is 20 percent, what is the worst-case NPV? Explain fully.
> Brickley Chains produces five different styles of silver chains, A, B, C, D, and E, in a highly automated batch machining process. The following table summarizes the production and cost data for the five products. Annual overhead is $80,000. Required: a.
> UniCom produces a wide range of consumer electronics. UniCom’s Newark, New York, plant produces two types of cordless phones: 2.4 GHz and 6.0 GHz. The following table summarizes operations at the Newark UniCom plant for the years 2009 a
> 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 f
> Fuentes Systems provides security software to law enforcement agencies. It has a sales force of 70 and has plans to add another 10–15 salespeople. Fuentes allocates corporate administrative costs based on the number of salespeople. The current total admi
> You are working in the office of the vice president of administration at International Telecon (IT) as a senior financial planner. IT is a Fortune 500 firm with sales approaching $1 billion. IT provides long-distance satellite communications around the w
> 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
> Mail delivery during the Christmas holidays of 1990 to U.S. troops stationed in Saudi Arabia for Operation Desert Storm was haphazard. So many letters and packages were mailed during the holidays, that warehouse space in Germany, which was the intermedia
> U.S. Pump is a multidivisional firm that manufactures and installs chemical piping and pump systems. The valve division makes a single standardized valve. The valve division and the installation division are currently involved in a transfer pricing dispu
> A large consulting firm is looking to expand the services currently offered its clients. The firm has developed a new performance metric called “Economic Earnings,” or EE for short. The performance metric is argued to be a better measure of both division
> A textbook on organization theory says: Drawing upon the writings of Maslow, McGregor presented his Theory X–Theory Y dichotomy to describe two differing conceptions of human behavior. Theory X assumptions held that people are inherently lazy, they disli
> The following data are available for the Megan Corp. finishing department for the current year. The department makes a single product that requires three hours of labor per unit of finished product. Budgeted volume for the year was 30,000 direct labor ho
> You are considering buying a $50,000 car. The dealer has offered you a 13.6 percent loan with 30 equal monthly payments. On questioning him, you find that the interest charge of $17,000 (or 0.136 x $50,000 x 2.5 years) is added to the $50,000 for a total
> Medical Instruments produces a variety of electronic medical devices. Medical Instruments uses a standard cost system and computes price variances at the time of purchase. One product, a thermometer, measures patient temperatures orally. It requires a si
> Flower City Cartridges (FCC) manufactures replacement cartridges for desktop printers. FCC uses standard costs within a job order cost system. In June, FCC purchased 18 gallons of blue ink for $385.20 and produced the following four different cartridge j
> American Cinema shows first-run movies. It pays the company distributing the movies a fixed fee of $1,000 per week plus a percentage of the gross box office receipts. In the first two weeks a movie is released, the theater pays the fixed fee of $1,000 pe
> Candice Company has decided to introduce a new product that can be manufactured by either of two methods. The manufacturing method will not affect the quality of the product. The estimated manufacturing costs of the two methods are as follows: Candice&ac
> Wedig Diagnostics manufactures two laser photometers that are used in preparing DNA tests. The U.S. model is designed for use in the United States and the EU model is designed to meet the specifications in most of the European Union. Both models are manu
> Hochstedt is a German firm with a wholly owned U.S. subsidiary. The parent firm manufactures and exports products from Germany to its U.S. subsidiary for sale in the United States. Hochstedt also has wholly owned subsidiaries in 14 other countries. The f
> Dr. Na Gu plans to open a radiology office that provides CAT scans. She can lease the CAT scanner for $1,200 per month plus $45 for each imaging session. In addition to the $45 lease cost per imaging session, Dr. Gu must purchase film for each session at
> “I used to run the company that made Formula 409, the spray cleaner. From modest entrepreneurial beginnings, we’d gone national and shipped the hell out of P&G, Colgate, Drackett, and every other giant that raised its head. From the beginning, I’d employ
> Emrich Processing is a small custom stainless steel parts processor. Customers send new and used stainless steel parts to Emrich for cleaning in various acid baths to remove small imperfections or films on the surface. These parts are used in a variety o
> The Stowbridge Division is analyzing expanding its Total Quality Management program. It already has a TQM program in place. However, one of its customers, Amlan Equipment, is asking all suppliers to become ISO 9000–qualified, a process that certifies tha
> Printers, Inc., manufactures and sells a midvolume color printer (MC) and a high-volume color printer (HC). Each MC requires 100 direct labor hours to manufacture and each HC requires 150 direct labor hours. At the beginning of the year, 700 MCs are sche
> The soldering department of Xtel Circuits solders integrated circuits onto circuit boards. The department is highly automated. The existing machinery is state of the art, having been installed only 15 months ago. Overhead in the department is allocated b
> Simple Plant manufactures DNA test strips. Manufacturing overhead is applied to units produced using direct labor dollars as the allocation base. The overhead rate is calculated prior to the beginning of the fiscal year that runs January 1 to December 31
> Marian Health Care is a large hospital system outside Chicago that offers both hospital (inpatient) and clinic (outpatient) services. It has a centralized admissions office that admits and registers clients, some of whom are seeking inpatient hospital se
> Houston Milling is a subcontractor to Pratt & Whitney, which makes jet engines. Houston Milling makes two different fuel pump housings for two Pratt & Whitney jet engines: the A11 housing and the D43. These pump housings are received from Pratt &
> CLIC manufactures two types of cigarette lighters: Basic and Super. A new plant began producing both lighter models this year. The following variable costing statement summarizes the first year of operations: For internal control purposes, variable costi
> Chemtrex is an agricultural chemical producer. Process costing is used in its mixing department. At the beginning of July, Chemtrex had 700,000 gallons 70 percent complete in work in process. During July, it started another 4,000,000 gallons and produced
> Beckett is a large car dealership that sells several different automobile manufacturers new cars (Toyota, Ford, Lexus, and Subaru). Beckett also consists of a Pre-owned Cars Department and a large service department. Beckett is organized into three profi
> 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 ca
> Kay Enterprises is a small, family-owned and managed business. It has a patented production process for manufacturing a digital switch used in large telephone switches. It manufactures two models in its plant in Atlanta, Georgia. The U.S. model is sold t
> New York Fashions owns 87 women’s clothing stores in shopping malls. Corporate headquarters of New York Fashions uses flexible budgets to control the operations of each of the stores. The following table presents the August flexible bud
> Your boss, the vice president of corporate accounting, has just returned from a two-week seminar in Maui on activity-based cost accounting. He says he wants to completely overhaul the company’s existing absorption-based accounting system. “Activity-based
> Overland Steel operates a coal-burning steel mill in New York state. Changes in the state’s air quality control laws will result in this mill’s incurring a $1,000 per day fine (which will be paid at the end of the year) if it continues to operate. The mi
> Five departments of National Training Institute, a nonprofit organization, share a rented building. Four of the departments provide services to educational agencies and have little or no competition for their services. The fifth department, Technical Tra
> Data for the Bidwell Company are as follows: Required: a. Based on the preceding data, calculate break-even sales in units. b. If Bidwell Company is subject to an effective income tax rate of 40 percent, calculate the number of units Bidwell would have t
> Kollel is a private hospital that operates in a large metropolitan area. The hospital admits “regular” patients and “private” patients. Regular patients are admitted and treated by s
> J.P. Max is a department store carrying a large and varied stock of merchandise. Management is considering leasing part of its floor space for $72 per square foot per year to an outside jewelry company that would sell merchandise. Two areas currently in
> Potter-Bowen (PB) manufactures and sells postage meters throughout the world. Postage meters print the necessary postage on envelopes, eliminating the need to affix stamps. The meter keeps track of the postage, the user takes the meter’s counter to a pos
> Portable Phones, Inc., manufactures and sells wireless telephones for residential and commercial use. Portable Phones’ plant is organized by product line, with five phone assembly departments in total. Each of these five phone assembly departments is res
> “It was in Deyang in 1969 that I came to know how China’s peasants really lived. Each day started with the production team leader allocating jobs. All the peasants had to work, and they each earned a fixed number of ‘work points’ (gong-fen) for their day
> US Copiers manufactures a full line of copiers including desktop models. The Small Copier Division (SCD) manufactures desktop copiers and sells them in the United States. A typical model has a retail price of less than $500. An integral part in the copie
> Some economists (e.g., Hayek) argue that decentralization of economic decisions in the economy leads to efficient resource allocation. What differences exist within the firm that make the link between decentralization and efficiency less clear?
> Federal Mixing (FM) is a division of Federal Chemicals, a large diversified chemical company. FM provides mixing services for both outside customers and other Federal divisions. FM buys or receives liquid chemicals and combines and packages them accordin
> Mr. Jones intends to retire in 20 years at the age of 65. As yet he has not provided for retirement income, and he wants to set up a periodic savings plan to do this. If he makes equal annual payments into a savings account that pays 4 percent interest p
> Taylor Chemicals produces a particular chemical at a fixed cost of $1,000 per day. The following table displays how marginal cost varies with output (in cases): Required: a. Given the preceding data, construct a table that reports total cost and average
> Telephone Computer Corporation (TCC) manufactures and sells two computerized directory assistance computers to telephone companies. The firm has its own sales force that sells directly to the phone companies. TCC currently sells two computer systems: the
> You are working for an investment banking firm. One of your clients is examining the possibility of purchasing Stirling Manufacturing, a parts supplier (specifically, tail-light assemblies) to the automobile industry. Stirling has sales of $130 million a
> Kinsley & Sons is a large, successful direct-mail catalog company in the highly competitive market for upscale men’s conservative business and business-casual dress wear. On sales of $185 million they had earnings of $13 million. Most of the sales are fr
> WWWeb Marketing is a decentralized firm specializing in designing and operating Internet marketing Web sites. 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, Serv
> Western Sugar processes sugar beets into granulated sugar that is sold to food companies. It uses a standard cost system to aid in cost control and performance evaluation. To compute the standards for next year, the actual expense incurred by expense cat
> Avant Designs designs and manufactures polished-nickel fashion bracelets. It offers two bracelets: Aztec and Mayan. The following data summarize budgeted operations for the current year: Budgeted fixed manufacturing overhead for the year was $258,000. Re
> The PQR Coal Company has several conventional and strip mining operations. Recently, new legislation has made strip mining, which produces coal of high sulfur content, unprofitable, so those operations will be discontinued. Unfortunately, PQR purchased $
> The Doe Company sells three products: sliced pineapples, crushed pineapples, and pineapple juice. The pineapple juice is a by-product of sliced pineapple, while crushed pineapples and sliced pineapples are produced simultaneously from the same pineapple.
> Neweway Plastics manufactures an acrylic compound used in automobile bumpers in a continuous flow process. Raw material is added at the beginning of the process and conversion costs are incurred uniformly over the process. The accompanying table summariz
> Healing Touch manufactures massage chairs with the following standard cost structure: During the month 500 chairs are manufactured and the following costs incurred: Required: a. Calculate all materials and labor variances (including price, quantity, wage
> Friendly Grocer has three departments in its store: beverages, dairy and meats, and canned and packaged foods. Each department is headed by a departmental manager. Operating results for the last month (in thousands) are given in the table. The direct cos
> One large company that has been successful in applying Total Quality Management (TQM) principles in manufacturing reports that it has had less success in applying the same techniques in improving administrative functions such as order taking, distributio
> Aspen View produces a full line of sunglasses. This year it began producing a new model of sunglasses, the Peak 32. It produced 5,300 pairs and sold 4,900 pairs. The following table summarizes the fixed and variable costs of producing Peak 32 sunglasses.
> DeJure Scents manufactures an aftershave and uses process costing. All materials are added at the beginning of the process and conversion costs are incurred uniformly over time. In May, DeJure started 15,000 gallons. There was no beginning inventory. May
> Just One, Inc., has two mutually exclusive investment projects, P and Q, shown below. Suppose the market interest rate is 10 percent. The ranking of projects differs, depending on the use of IRR or NPV measures. Which project should be selected? Why is t
> 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 distil
> Why are drivers for long-haul (cross-country) moving companies (e.g., Allied Van Lines) often franchised, while moving companies that move households within the same city hire drivers as employees? Franchised drivers own their own trucks. They are not pa
> 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
> Royal Resort and Casino (RRC), a publicly traded company, caters to affluent customers seeking plush surroundings, high-quality food and entertainment, and all the “glitz” associated with the best resorts and casinos.
