Sam, Martina, Aretha, Roxi, and Tomas (SMART) operate a management consulting firm. The firm has just received an inquiry from a prospective client about its prices for educational seminars to teach its supervisors better communications skills. The prospective client wants bids for three alternative activity levels: (1) one seminar with 20 participants, (2) four seminars with 20 participants each (80 participants total), or (3) eight seminars with 140 participants in total. The consulting firm’s accountants have provided the following differential cost estimates: Setup costs for the entire job . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 600 Materials costs per participant (brochures, handouts, coffee, lunch, etc.) . . . 100 Differential Direct Labor Costs: One seminar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,200 Four seminars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,200 Eight seminars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,800 In addition to the preceding differential costs, SMART allocates fixed costs to jobs on a direct-labor-cost basis, at a rate of 75 percent of direct labor costs (excluding setup costs). For example, if direct labor costs are $100, SMART would also charge the job $75 for fixed costs. SMART charges clients for its costs plus 25 percent. For the purpose of charging customers, costs equal the setup costs plus materials costs plus differential labor costs plus allocated fixed costs. SMART has enough excess capacity to handle this job with ease. Required a. Assume SMART’s bid equals the total cost, including fixed costs allocated to the job, plus the 25 percent markup on cost. What should SMART bid for each of the three levels of activity? b. Compute the differential cost (including setup costs) and the contribution to profit for each of the three levels of activity. Note that fixed costs are not differential costs. c. Assume the prospective client gives three options. It is willing to accept either of SMART’s bids for the one-seminar or four-seminar activity levels, but the prospective client will pay only 85 percent of the bid price for the eight-seminar package. SMART’s president responds, “We can’t make money in this business by shaving our bids! Let’s take the four-seminar option because we make the most profit on it.” Do you agree? What would be the contribution to profit for each of the three options?
> A company has several units of old-model telephones that it is selling for $10 per unit. The units cost $25 to produce. Is the company engaging in predatory pricing? Explain.
> Consider the Business Application item, referred to in Question 4-17. Suppose the company had signed a lease for five years and had two years remaining on the contract. Would the remaining lease payments be relevant to the decision to move? Explain why o
> Consider the Business Application item, “Cost Analysis and the Choice of Office Space for a Small Business”. In the decision to relocate to the virtual office, what are the differential costs? What costs would not be differential?
> A company has learned that a particular input product required for its production of several products is in limited supply. What approach should management take to maximize profits in the presence of this constraint?
> What is dumping? What role would a cost accountant play in determining whether dumping has occurred?
> Atlantic Soup Company is presently operating at 75 percent of capacity. Worried about the company’s performance, the president is considering dropping its clam chowder line. If clam chowder is dropped, the revenue associated with it wou
> You and two friends drive your car to Texas for spring break. A third friend asks if you can drop her off in Oklahoma. How would you allocate the cost of the trip among the four of you?
> Refer to the facts in Exercise 4-42. Mel suddenly finds an opportunity to sell boxed dinners. The new opportunity would require the use of the 30 percent unused capacity. The contribution margin from the dinners would amount to $3,000 annually. In Exerc
> Mel’s Meals 2 Go purchases cookies that it includes in the 10,000 box lunches it prepares and sells annually. Mel’s kitchen and adjoining meeting room operate at 70 percent of capacity. Mel’s purchases the cookies for $0.60 each but is considering making
> Mobility Partners makes wheelchairs and other assistive devices. For years it has made the rear wheel assembly for its wheelchairs. A local bicycle manufacturing firm, Trailblazers, Inc., offered to sell these rear wheel assemblies to Mobility. If Mobili
> Terracotta, Inc., makes toy soldiers. Company management believes that a new model would sell well at a price of $65. The company estimates unit materials costs to be $16 for the model, and overhead costs would average $20 per unit. The local wage rate f
> Dino’s, Inc., makes a variety of T-shirts with logos. The company has discovered a new market for sweatshirts with logos. Market research indicates that a sweatshirt like this would sell well in the market priced at $36 each. Dino’s desires an operating
> Sid’s Skins makes a variety of covers for electronic organizers and portable music players. The company’s designers have discovered a market for a new clear plastic covering with college logos for a popular music player. Market research indicates that a
> Mission Electronics manufactures and sells basic DVD players under various generic store brand names. The cost of one of their models follows: Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18.0
> Andreasen Corporation manufactures thermostats for office buildings. The following is the cost of each unit: Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18.00 Labor . . . . . . . . . . . . . . . .
> Mother’s Bottlers, Inc., is a small bottling company that bottles and sells cold teas for $5 per unit. The cost of each unit follows: Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.50 Labor .
> Assume that Cold Rock sells ice cream for $4.80 per gallon. The cost of each gallon follows: Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.80 Labor . . . . . . . . . . . . . . . . . . . .
> In evaluating product profitability, we can ignore marketing costs because they are not considered product costs. Do you agree?
> Carlsbad Enterprises has a capacity to produce 400,000 computer cases per year. The company is currently producing and selling 320,000 cases per year at a selling price of $80 per case. The cost of producing and selling one case follows: Variable manufac
> Maria’s Food Service provides meals that nonprofit organizations distribute to handicapped and elderly people. Here is her forecasted income statement for April, when she expects to produce and sell 3,000 meals: Fixed costs included i
> Under what circumstances would fixed costs be relevant when management is making decisions in a multiproduct setting?
> If you are considering buying a second car, what are the differential costs of that decision? Are they the same as in Question 4-26? Why or why not? In Question 4-26 If you are considering driving to a weekend resort for a quick break from school, what
> If you are considering driving to a weekend resort for a quick break from school, what are the differential costs of operating your car for that drive?
> Many airline frequent-flier programs upgrade elite (high volume) flyers one, three, or five days in advance from economy to first class. What are the differential costs of doing this? What are the opportunity costs? What are the opportunity costs of not
> A manager in your organization just received a special order at a price that is “below cost.” The manager points to the document and says, “These are the kinds of orders that will get you in trouble. Every sale must bear its share of the full costs of ru
> One of your acquaintances notes, “This whole subject of differential costing is easy; variable costs are the only costs that are relevant.” How would you respond?
> As a marketing manager for an airline, would you sell a seat to a passenger who walked up to the gate at the last minute at the variable (marginal) cost? Why or why not? Do the costs from the accounting system include all relevant costs for the decision?
> On what three main factors does the theory of constraints focus?
> The cost per seat-mile for a major U.S. airline is 13.7¢. Therefore, to estimate the cost of flying a passenger from Detroit to Los Angeles, we should multiply 1,980 miles by 13.7¢. Do you agree?
> What are some nonfinancial factors in decisions to drop a product line?
> Why are production constraints important in determining the optimal product mix?
> If we want to maximize profit, why do we use unit contribution margins in our analysis instead of unit gross margins?
> What is price discrimination? How could a cost accountant help determine if differences in prices were evidence of price discrimination?
> What is predatory pricing? Why is it illegal in many jurisdictions?
> What do the terms target cost and target price mean? Explain how they are developed.
> What are life-cycle product costing and pricing?
> What costs are included in the full cost of a product? Is a product’s full cost always the appropriate cost for decision makers to use?
> Are sunk costs ever differential costs?
> The Liquid Chemical Company manufactures and sells a range of high-grade products. Many of these products require careful packaging. The company has a special patented lining made that it uses in specially designed packing containers. The lining uses a s
> “Materials and labor are always direct costs, and supply costs are always indirect.” What is your opinion of this statement?
> To win a predatory pricing case, law enforcement officials traditionally have had to prove that a company has sold products or services for less than their average variable cost. Companies with relatively high fixed costs and low variable costs are less
> Layton Machining Company (LMC) manufactures two versions of a basic machine tool. One version is a standard model and one is a custom model, which requires some additional work and slightly higher-grade materials. The manufacturing process at LMC require
> Slavin Corporation manufactures two products, Alpha and Delta. Each product requires time on a single machine. The machine has a monthly capacity of 500 hours. Total market demand for the two products is limited to 150 units (each) monthly. Slavin is cur
> The Bubble Company produces a variety of bottles from recycled plastic. The company has one particular machine on which it can produce either of two types of water bottles, 1-liter bottles or 1/2-liter bottles. Sales demand for both products is such that
> You have been asked to assist the management of Ironwood Corporation in arriving at certain decisions. Ironwood has its home office in Michigan and leases factory buildings in Wisconsin, Minnesota, and North Dakota, all of which produce the same product.
> Power Music owns five music stores, where it sells music, instruments, and supplies. In addition, it rents instruments. At the end of last year, the new accounts showed that although the business as a whole was profitable, the Fifth Avenue store had show
> Carson Corporation produces and sells three products, Alpha, Beta, and Gamma, in a local market and in a regional market. At the end of the first quarter of the current year, the following income statement (in thousands of dollars) has been prepared: M
> King City Specialty Bikes (KCSB) produces high-end bicycles. The costs to manufacture and market the bicycles at the company’s volume of 2,000 units per month are shown in the following table: The company has the capacity to produce 2
> M. Anthony, LLP, produces music in a studio in London. The cost of producing one typical song follows: Average Cost per Song: Labor, including musicians and technicians . . . . . . . . . . . . . . . $17,000 Variable overhead, including clerical support .
> What do the terms variable costs and fixed costs mean?
> Sherene Nili manages a company that produces wedding gowns. She produces both a custom product that is made to order and a standard product that is sold in bridal salons. Her accountant prepared the following forecasted income statement for March, which
> Playful Pens, Inc., makes a single model of a pen. The cartridge for the pen (which contains the ink) is manufactured on one machine. The cartridge holder (which you hold when you hold the pen) is manufactured on another machine. Monthly capacities and p
> CompDesk, Inc., makes a single model of an ergonomic desk (with chair) for computer usage. The desk is manufactured in building 1, and the chair is manufactured in building 2. Monthly capacities and production levels are as follows: The company will se
> Freeflight Airlines is presently operating at 70 percent of capacity. Management of the airline is considering dropping Freeflight’s routes between Europe and the United States. If these routes are dropped, the revenue associated with t
> Fixed costs are often defined as “fixed over the short run.” Does this mean that they are not fixed over the long run? Why or why not?
> Compare cost-volume-profit (CVP) analysis with profit-volume analysis. How do they differ?
> How does the total contribution margin differ from the gross margin that is often shown on companies’ financial statements?
> What are the components of total costs in the profit equation?
> Why is it common to assume a fixed sales mix before finding the break-even volume with multiple products?
> How do income taxes affect the break-even equation? Why?
> What do the terms step costs and semivariable costs mean?
> Write out the equation for the target volume (in units) profit equation when the income tax rate is t.
> What is the margin of safety? Why is this important for managers to know?
> What is operating leverage? Why is knowledge of a firm’s operating leverage important to its managers?
> Rio Coffee Shoppe sells two coffee drinks, a regular coffee and a latte. The two drinks have the following prices and cost characteristics: The monthly fixed costs at Rio are $6,720. Based on experience, the manager at Rio knows that the store sells 60
> Crest Industries sells a single model of satellite radio receivers for use in the home. The radios have the following price and cost characteristics: Sales price . . . . . . . . . . . . . . . $ 160 per radio Variable costs . . . . . . . . . . . . . . 64
> Refer to the data for Balance, Inc., in Exercise 3-27. In Exercise 3-27 Balance, Inc., is considering the introduction of a new energy snack with the following price and cost characteristics: Sales price . . . . . . . . . . . . . . . $ 1.00 per unit Var
> Refer to the data for Cambridge, Inc., in Exercise 3-25. In Exercise 3-25 Cambridge, Inc., is considering the introduction of a new calculator with the following price and cost characteristics: Sales price . . . . . . . . . . . . . . . . . . . . $ 27 pe
> Rainbow Tours gives walking tours of Springfield. Rainbow charges $40 per person for the tour and incurs $16 in variable costs for labor, drinks, and maps. The monthly fixed costs for Rainbow Tours are $3,600. Required a. How many tours must Rainbow sel
> Foxx Company’s cost structure is dominated by variable costs with a contribution margin ratio of .25 and fixed costs of $100,000. Every dollar of sales contributes 25 cents toward fixed costs and profit. The cost structure of a competitor, Beyonce, Inc.,
> The Dollar Store’s cost structure is dominated by variable costs with a contribution margin ratio of .30 and fixed costs of $30,000. Every dollar of sales contributes 30 cents toward fixed costs and profit. The cost structure of a compe
> As a manager making a decision, which is likely more important: gross margin or contribution margin? Why?
> What is the difference in meaning between the terms cost and expense?
> How can the way an organization creates and carries out its incentive plan improve the effectiveness of that plan?
> Why might a balanced scorecard like the one in question 7 be more effective than simply using merit pay for a manager?
> Stock options have been called the pay program that “built Silicon Valley” because of their key role as incentive pay for employees in high-tech companies. They were popular during the 1990s when the stock market was rising rapidly. Since then, the stock
> Suppose you work in the HR department of a manufacturing company that is planning to enrich jobs by having production workers work in teams and rotate through various jobs. The pay structure will have to be adjusted to fit this new work design. How would
> Why might an organization choose to pay employees more than the market rate? Why might it choose to pay less? What are the consequences of paying more or less than the market rate?
> In gathering data for its pay policies, what product markets would a city’s hospital want to use as a basis for comparison? What labor markets would be relevant? How might the labor markets for surgeons be different from the labor market for nursing aide
> In setting up a pay structure, what legal requirements must an organization meet? Which of these do you think would be most challenging for a small start-up business? Why?
> Why do some employers subsidize the pay of military reserve members called up to active duty? If the military instead paid these people the wage they command in the civilian market (that is, the salary they earn at their regular jobs), who would bear the
> Suppose the company in question 1 wants to establish a skills-based pay structure. What would be some advantages of this approach? List the issues the company should be prepared to address in setting up this system. Consider the kinds of information you
> What are the advantages of establishing pay ranges, rather than specific pay levels, for each job? What are the drawbacks of this approach?
> Discuss several advantages of flexible work schedules. What are some disadvantages?
> Pay structure consists of the relative pay for different jobs within the organization. Establishing a pay structure simplifies the process of making decisions about individual employees’ pay by grouping together employees with similar jobs. Organizations
> Summarize the way organizations use information about jobs as a basis for a pay structure.
> In what type of situation would an employer have a legitimate reason for learning about an employee’s personal matters outside the workplace?
> For the situation in question 2, how would a formal discipline policy help the organization address issues of fairness? Situation from Question 2: A member of a restaurant’s serving staff is chronically late for work.
> A member of a restaurant’s serving staff is chronically late for work. From the organization’s point of view, what fairness issues are involved in deciding how to handle this situation? In what ways might the employees’ and other servers’ ideas of fairne
> Give an example of voluntary turnover and an example of involuntary turnover. Why should organizations try to reduce both kinds of turnover?
> Why are exit interviews important? Should an organization care about the opinion of people who are leaving? How are those opinions relevant to employee separation and retention?
> What are the four factors that influence an employee’s job dissatisfaction (or satisfaction)? Which of these do you think an employer can most easily change? Which would be the most expensive to change?
> List forms of behavior that can signal job withdrawal.
> A risk of disciplining employees is that some employees retaliate. To avoid this risk, what organizational policies might encourage low-performing employees to leave while encouraging high-performers to stay? (Consider the sources of employee satisfactio
> When a restaurant employee slipped on spilled soup and fell, requiring the evening off to recover, the owner realized that workplace safety was an issue to which she had not devoted much time. A friend warned the owner that if she started creating a lot
> How does a complete performance management system differ from the use of annual performance appraisals?
> Suppose you are a human resource professional helping to improve the performance management system of a company that sells and services office equipment. The company operates a call center that takes calls from customers who are having problems with thei
> Besides giving employees feedback, what steps can a manager take to improve employees’ performance?
> Continuing the example in question 7, imagine that you are preparing for your first performance feedback session. You want feedback to be effective—that is, you want the feedback to result in improved performance. List five or six steps you can take to a
> Suppose you were recently promoted to a supervisory job in a company where you have worked for two years. You genuinely like almost all your co-workers, who now report to you. The only exception is one employee, who dresses more formally than the others
