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Chapter 19: Q19-12RQ (page 1063)
Explain the difference between the target price and target cost.
Target price is related to the customer鈥檚 will to pay for the project and the target cost is the maximum cost that a business incurs to achieve the target price keeping in view of desired profit.
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Anu Ghai was a new production analyst at RHI, Inc., a large furniture factory in North Carolina. One of her first jobs was to update the predetermined overhead allocation rates for factory production costs. This was normally done once a year, by analysing the previous year鈥檚 actual data, factoring in projected changes, and calculating a new rate for the coming year. What Anu found was strange. The activity rate for 鈥渕aintenance鈥� had more than doubled in one year, and she was puzzled how that could have happened. When she spoke with Larry McAfee, the factory manager, she was told to spread the increases out over the other activity costs to 鈥渟mooth out鈥� the trends. She was a bit intimidated by Larry, an imposing and aggressive man, but she knew something wasn鈥檛 quite right. Then one night she was at a restaurant and overheard a few employees who worked at RHI talking. They were joking about the work they had done fixing up Larry鈥檚 home at the lake last year. Suddenly everything made sense. Larry had been using factory labor, tools, and supplies to have his lake house renovated on the weekends. Anu had a distinct feeling that if she went up against Larry on this issue, she would come out the loser. She decided to look for work elsewhere.
Requirements
1. Besides spotting irregularities, like the case above, what are some other ways that ABC cost data are useful for manufacturing companies?
2. What are some of the other options that Anu might have considered?
The following information is provided for Orbit Antenna Corp., which manufactures two products: Lo-Gain antennas and Hi-Gain antennas for use in remote areas.
Activity Cost Allocation Base
Setup \( 58,000 Number of setups
Machine maintenance 30,000 Number of machine hours
Total indirect manufacturing costs \) 88,000
Lo-Gain Hi-Gain Total
Direct labor hours 1,200 3,800 5,000
Number of setups 40 40 80
Number of machine hours 3,000 2,000 5,000
Orbit Antenna plans to produce 125 Lo-Gain antennas and 225 Hi-Gain antennas.
Requirements
1. Compute the indirect manufacturing cost per unit using direct labor hours for the single plantwide predetermined overhead allocation rate.
Activity-based costing requires four steps. List the four steps in the order they are performed.
List and define the four types of quality costs.
Question:The Watkins Company is decentralized, and divisions are considered investment centers. Watkins specializes in sports equipment, and one division manufactures netting that is used for basketball hoops, soccer goals, and other sports equipment. The Netting Division reports the following information for a heavy-duty basketball hoop net:
Sales Price per Unit \( 18
Variable Cost per Unit 6
Contribution Margin per Unit \) 12
The Basketball Equipment Division can purchase a similar heavy-duty net from an outside vendor for $15.
Requirements
1. Determine the negotiable range for the transfer price.
2. What is the minimum transfer price the Netting Division should consider if operating at capacity? Below capacity?
3. What is the maximum transfer price the Basketball Equipment Division should consider?
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