# Min target prices target costs activity based costing

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12-9 12-21 (2530 min.) Target prices, target costs, activity-based costing. 1. Snappys operating income in 2006 is as follows: Total for 250,000 Tiles (1) Per Unit (2) = (1) ÷ 250,000 Revenues (\$4 250,000) Purchase cost of tiles (\$3 250,000) Ordering costs (\$50 500) Receiving and storage (\$30 4,000) Shipping (\$40 1,500) Total costs Operating income \$1,000,000750,000 25,000 120,000 60,000955,000\$ 45,000\$4.003.00 0.10 0.48 0.243.82\$0.18
12-10 12-22 (20 min.)Target costs, effect of product-design changes on product costs. 1. and 2.Manufacturing costs of HJ6 in 2006 and 2007 are as follows: 20062007 Per Unit Per Unit Total (2) = Total (4) = (1)(1) ÷ 3,500(3) (3) ÷ 4,000 Direct materials, \$1,200 × 3,500; \$1,100 × 4,000 \$4,200,000 \$1,200 \$4,400,000 \$1,100 Batch-level costs, \$8,000 × 70; \$7,500 × 80 560,000 160 600,000 150 Manuf. operations costs, \$55 × 21,000; \$50 × 22,000 1,155,000 330 1,100,000 275 Engineering change costs, \$12,000 × 14; \$10,000 × 10 168,00048100,00025Total \$6,083,000\$1,738\$6,200,000\$1,5503. Target manufacturing costper unit of HJ6 in 2007= Manufacturing costper unit in 2006× 90% = \$1,738 × 0.90 = \$1,564.20 Actual manufacturing cost per unit of HJ6 in 2007 was \$1,550. Hence, Medical Instruments did achieve its target manufacturing cost per unit of \$1,564.20 4. To reduce the manufacturing cost per unit in 2007, Medical Instruments reduced the cost per unit in each of the four cost categoriesdirect materials costs, batch-level costs, manufacturing operations costs, and engineering change costs. It also reduced machine-hours and number of engineering changes madethe quantities of the cost drivers. In 2006, Medical Instruments used 6 machine-hours per unit of HJ6 (21,000 machine-hours 3,500 units). In 2007, Medical Instruments used 5.5 machine-hours per unit of HJ6 (22,000 machine-hours 4,000 units). Medical Instruments reduced engineering changes from 14 in 2006 to 10 in 2007. Medical Instruments achieved these gains through value engineering activities that retained only those product features that customers wanted while eliminating nonvalue-added activities and costs.
12-11 12-23 (20 min.) Cost-plus target return on investment pricing. 1. Target operating income = target return on investment invested capital Target operating income (25% of \$960,000) \$240,000 Total fixed costs 352,000Target contribution margin \$592,000Target contribution per room-night, (\$592,000 ÷ 16,000) \$37 Add variable costs per room-night 3Price to be charged per room-night \$40ProofTotal room revenues (\$40 16,000 room-nights) \$640,000 Total costs: Variable costs (\$3 16,000) \$ 48,000 Fixed costs 352,000Total costs 400,000Operating income \$240,000