# Min target prices target costs activity based costing

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12-21 (25–30 min.) Target prices, target costs, activity-based costing. 1. Snappy’s operating income in 2008 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 \$1,000,000 750,000 25,000 120,000 60,000 955,000 \$ 45,000 \$4 .00 3.00 0.10 0.48 0 .24 3 .82 \$0 .18 2. Price to retailers in 2009 is 95% of 2008 price = 0.95 × \$4 = \$3.80; cost per tile in 2009 is 96% of 2008 cost = 0.96 × \$3 = \$2.88. Snappy’s operating income in 2009 is as follows: Total for 250,000 Tiles (1) Per Unit (2) = (1) ÷ 250,000 Revenues (\$3.80 × 250,000) Purchase cost of tiles (\$2.88 × 250,000) Ordering costs (\$50 × 500) Receiving and storage (\$30 × 4,000) Shipping (\$40 × 1,500) Total costs Operating income \$ 950,000 720,000 25,000 120,000 60,000 925,000 \$ 25,000 \$3 .80 2.88 0.10 0.48 0 .24 3 .70 \$0 .10 3. Snappy’s operating income in 2009 , if it makes changes in ordering and material handling, will be as follows: Total for 250,000 Tiles (1) Per Unit (2) = (1) ÷ 250,000 Revenues (\$3.80 × 250,000) Purchase cost of tiles (\$2.88 × 250,000) Ordering costs (\$25 × 200) Receiving and storage (\$28 × 3,125) Shipping (\$40 × 1,500) Total costs Operating income \$950,000 720,000 5,000 87,500 60,000 872,500 \$ 77,500 \$3 .80 2.88 0.02 0.35 0 .24 3 .49 \$0 .31 Through better cost management, Snappy will be able to achieve its target operating income of \$0.30 per tile despite the fact that its revenue per tile has decreased by \$0.20 (\$4.00 – \$3.80), while its purchase cost per tile has decreased by only \$0.12 (\$3.00 – \$2.88). 12- 9
12-22 (20 min.) Target costs, effect of product-design changes on product costs . 1. and 2. Manufacturing costs of HJ6 in 2008 and 2009 are as follows: 2008 2009 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 × 10 168,000 48 100,000 25 Total \$6,083,000 \$1,738 \$6,200,000 \$1,550 3. Target manufacturing cost per unit of HJ6 in 2009 = Manufacturing cost per unit in 2008 × 90% = \$1,738 × 0.90 = \$1,564.20 Actual manufacturing cost per unit of HJ6 in 2009 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 2009, Medical Instruments reduced the cost per unit in each of the four cost categories—direct materials costs, batch-level costs, manufacturing operations costs, and engineering change costs. It also reduced machine-hours and number of engineering changes made—the quantities of the cost drivers. In 2008, Medical Instruments used 6 machine-hours per unit of HJ6 (21,000 machine-hours ÷ 3,500 units). In 2009, 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 2008 to 10 in 2009. 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- 10