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Ch11HWSolutionsPlus

# Ch11HWSolutionsPlus - CHAPTER 11 STRATEGIC COST MANAGEMENT...

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CHAPTER 11 STRATEGIC COST MANAGEMENT 11–3 1. Supplier cost: First, calculate the activity rates for assigning costs to suppliers: Inspecting components: \$1,200,000/1,000 = \$1,200 per sampling hour Expediting work: \$960,000/100 = \$9,600 per order Reworking products: \$6,844,500/1,500 = \$4,563 per rework hour Warranty work: \$21,600,000/4,000 = \$5,400 per warranty hour Next, calculate the cost per component by supplier: Supplier cost: Grayson Lambert Purchase cost: \$144 × 200,000 ...................... \$28,800,000 \$129 × 800,000 ...................... \$103,200,000 Inspecting components: \$1,200 × 20 ............................ 24,000 \$1,200 × 980 .......................... 1,176,000 Expediting work: \$9,600 × 10 ............................ 96,000 \$9,600 × 90 ............................ 864,000 Reworking products: \$4,563 × 90 ............................ 410,670 \$4,563 × 1,410 ....................... 6,433,830 Warranty work: \$5,400 × 200 .......................... 1,080,000 \$5,400 × 3,800 ....................... 20,520,000 Total supplier cost .................... \$30,410,670 \$132,193,830 Units supplied ........................... ÷ 200,000 ÷ 800,000 Unit cost ................................ \$ 152.05 * \$ 165.24 * *Rounded to the nearest cent. The difference favors Grayson; furthermore, when the price concession is considered (\$135 – \$144), the cost of Grayson is \$143.05, which is much less than the Lambert component. Zavner should give serious consideration to accepting the contractual offer made by Grayson. The savings are in the mil- lions.

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11–3 Concluded 2. To assign the lost sales cost, it would be helpful to know the number of de- fective units using the Grayson component versus those using the Lambert component. Warranty hours would act as a very good substitute driver. Us- ing this driver, the rate is \$4,500,000/4,000 = \$1,125 per warranty hour. The cost assigned to each component would be: Grayson Lambert Lost sales: \$1,125 × 200 ............ \$225,000 \$1,125 × 3,800 ......... \$4,275,000 This increases the cost of the Lambert component by \$4,275,000/800,000 = \$5.34 *. *Rounded. 11–4 1. Sales revenue = \$0.75 × 10,000,000 = \$7,500,000 for each customer type. ( Note : The total number of parts is the average order size times the number of sales orders.) Thus, the total customer-related activity costs are split equally: Cost allocation = 0.50 × \$5,900,000 = \$2,950,000 The profitability of each category is calculated as follows: Sales revenue ............................................................................. \$7,500,000 Less: Noncustomer-related cost (\$0.40 × 10,000,000) ........... 4,000,000 Less: Customer-related activity costs ..................................... 2,950,000 Customer profitability .......................................................... \$ 550,000 This profitability measure is suspect because the customer-related costs are assigned using revenues, a driver that is not causally related to the custom- er-related activity costs. This approach may actually have one set of custom- ers subsidizing the other.
11–4 Concluded 2. Activity-based customer costing: First, calculate the activity rates for assigning costs to suppliers: Processing sales orders: \$1,100,000/11,000 = \$100 per order Scheduling production: \$600,000/20,000 = \$30 per scheduling hour Setting up equipment: \$1,800,000/15,000 = \$120 per setup Inspecting batches: \$2,400,000/15,000 = \$160 per inspection Next, assign the costs to the customers (those who place frequent orders and those who place infrequent orders): Frequent Infrequent Processing sales orders: \$100 × 10,000 ........................... \$ 1,000,000 \$100 × 1,000 ............................. \$ 100,000 Scheduling production: \$30 × 17,500 ............................. 525,000 \$30 × 2,500 ............................... 75,000 Setting up equipment: \$120 × 12,500 ........................... 1,500,000 \$120 × 2,500 ............................. 300,000 Inspecting batches: \$160 × 12,500 ........................... 2,000,000 \$160 × 2,500 ............................. 400,000 Total customer cost ..................... \$ 5,025,000 \$ 875,000 Profitability: Frequent Infrequent Sales revenue ............................... \$ 7,500,000 \$7,500,000 Less: Other costs ......................... 4,000,000 4,000,000 Less: Customer-related costs ..... 5,025,000 875,000 Customer profitability ............ \$ (1,525,000 ) \$ 2,625,000 This outcome reveals that customers who place smaller, more frequent or- ders are not profitable. Actions must be taken to make this segment profit- able, or this category of customers could be dropped. One possibility is to

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Ch11HWSolutionsPlus - CHAPTER 11 STRATEGIC COST MANAGEMENT...

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