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1. The order will boost Heartland’s net income by $13,950, as the following
calculations show.
Sales revenue............................................. $82,500
Less: Sales commissions (10%)................... 8,250 $74,250
Less manufacturing costs:
Direct material........................................ $14,600
Direct labor............................................ 28,000
Variable manufacturing overhead *.................... 8,400
Total manufacturing costs 51,000
Income before taxes.................................... $ 23,250
Income taxes (40%).................................... 9,300
Net income .............................................. $ 13,950
*Based on an analysis of the year just ended, variable overhead is 30 percent
of direct labor ($1,125 ¸ $3,750). For Premier’s Foods’ order:
Direct-labor cost x .30 = $28,000 x .30 = $8,400.
2. Yes. Although this amount is below the $82,500 full-cost price, the order is still
profitable. Heartland can afford to pick up some additional business, because
the company is operating at 75 percent of practical capacity.
Sales revenue.................................................. $63,500
Less: Sales commissions (10%)........................ 6,350 $57,150
Less manufacturing costs:
Direct material $14,600
Note that the fixed manufacturing overhead and fixed corporate administration
costs are not relevant in this decision, because these amounts will remain the
same regardless of what Heartland’s management decides about the order.
PROBLEM 15-38 (CONTINUED)
$16,000
= 1,000,000
= $.016
2. As in requirement (1), 500 direct-labor hours are required for the job.
1. The minimum price per blanket that Detroit Synthetic Fibers, Inc. could bid
without reducing the company’s net income is $48 calculated as follows:
2. Using the full cost criteria and the maximum allowable return specified, Detroit
Synthetic Fibers, Inc.’s bid price per blanket would be $59.80 calculated as
follows:
Since total revenue must equal $6,915,000, the revenue per hour must be $276.60
($6,915,000 ÷ 25,000 hours).
No. A 14% return requires that MSC generate revenue per service hour of $298.20
($7,455,000 ÷ 25,000 hours), which is clearly in excess of the $265 market price.
5. To achieve a 14% return and a $265 revenue-per-hour figure, the company must trim
its costs. MSC could use value engineering, a technique that utilizes information
collected about a service’s design and associated production process. The goal is to
examine the design and process and then identify improvements that would produce
cost savings.
Department I Department II
Variable overhead
Department I: 37,500 $12 ......................................................
$450,000
Department II: 37,500 $6 ........................................................ $ 225,000
225,000
Fixed overhead ............................................................................. 225,000
Total overhead ..............................................................................
$675,000 $ 450,000
Total budgeted overhead for both
departments ($675,000 + $450,000) ............................................ $1,125,000
Total expected direct-labor hours for
both departments (37,500 + 37,500) ............................................ 75,000
budgeted overhead
Predetermined overhead rate = budgeted direct -labor hours
$1,125,000
= 75,000
2. Standard Deluxe
Total cost ......................................................................................
$600.00 $750.00
Markup (15% of cost)
Standard: $600 .15 ...............................................................
90.00
Deluxe: $750 .15 ....................................................................
______ 112.50
Price ............................................................................................
$690.00 $862.50
3. Department I Department II
Budgeted overhead (from requirement 1)........................................
$675,000 $450,000
37,500
Budgeted direct-labor hours .......................................................... 37,500
$675,000 $450,000
Calculation of predetermined overhead rate ...................................
37,500 37,500
4. Standard Deluxe
Direct material ..............................................................................
$240 $390
Direct labor ...................................................................................
210 210
Manufacturing overhead:
Department I:
Standard: 2 $18 ................................................................. 36
Deluxe: 8 $18 ..................................................................... 144
Department II:
Standard: 8 $12 ................................................................. 96
Deluxe: 2 $12 ..................................................................... 24
Total cost ......................................................................................
$582 $768
5. Standard Deluxe
Total cost (from requirement 4).......................................................
$582.00 $768.00
Markup (15% of cost)
Standard: $582 .15 ................................................................ 87.30
Deluxe: $768 .15 ....................................................................
______ 115 .20
Price ............................................................................................
$669 .30 $883 .20
1. Target costing is market driven, beginning with a determination of the selling price
that customers are willing to pay. That price is dependent on the product they
purchase and the product’s features. It is only natural that a marketing team becomes
heavily involved in this process, since customer feedback is crucial to the design
process.
2. Add cabinet doors: [(10 x 1) + (20 x 2) + (30 x 3) + (60 x 4) + (80 x 5)] = 780; 780 ÷
200 = 3.900
Expand storage area: [(10 x 1) + (40 x 2) + (70 x 3) + (50 x 4) + (30 x 5)] = 650; 650 ÷
200 = 3.250
Add security lock: [(30 x 1) + (60 x 2) + (50 x 3) + (40 x 4) + (20 x 5)] = 560; 560 ÷
200 = 2.800
New appearance for table top: [(10 x 1) + (20 x 2) + (50 x 3) + (60 x 4) + (60 x 5)] =
740; 740 ÷ 200 = 3.700
Extend warranty: [(40 x 1) + (70 x 2) + (30 x 3) + (35 x 4) + (25 x 5)] = 535; 535 ÷
200 = 2.675
PROBLEM 15-47 (CONTINUED)
3. (a) Danish Interiors currently earns a $48 profit on each table sold ($240 - $192),
which translates into a 20% markup on sales ($48 ÷ $240). The current
competitive market price is $285, which means that if the company maintains
the 20% markup, it will earn $57 ($285 x 20%) per unit. The maximum
allowable cost is therefore $228 ($285 - $57).
(b) Customers feel most strongly about adding cabinet doors and giving the table
top a new appearance. Both of these features can be added, and Danish
Interiors will be able to earn its 20% markup. The third and fifth most
desirable features (the expanded storage area and extended warranty) are too
costly. If it desires, management could also add a lock to the storage area.
Supporting calculations follow.
4. An expanded storage area would be the most logical additional feature in view of its
no. 3 ranking. Danish Interiors might use value engineering to study the design and
production process of both the table as currently manufactured as well as the proposed
new features. The goal is to identify improvements and associated reductions in cost
that may allow the company to add previously rejected options.