13-18 (25–30 min.) Target prices, target costs, activity-based costing.
Snappy Tiles is a small distributor of marble tiles. Snappy identifies its three major activities and
cost pools as ordering, receiving and storage, and shipping, and it reports the following details for
2013:
For 2013, Snappy buys 250,000 marble tiles at an average cost of $3 per tile and sells them to
retailers at an average price of $4 per tile. Assume Snappy has no fixed costs and no inventories.
Required:
1. Calculate Snappy’s operating income for 2013.
2. For 2014, retailers are demanding a 5% discount off the 2013 price. Snappy’s suppliers are
only willing to give a 4% discount. Snappy expects to sell the same quantity of marble tiles in
2014 as in 2013. If all other costs and cost-driver information remain the same, calculate
Snappy’s operating income for 2014.
3. Suppose further that Snappy decides to make changes in its ordering and receiving-and-storing
practices. By placing long-run orders with its key suppliers, Snappy expects to reduce the
number of orders to 200 and the cost per order to $25 per order. By redesigning the layout of
the warehouse and reconfiguring the crates in which the marble tiles are moved, Snappy
expects to reduce the number of loads moved to 3,125 and the cost per load moved to $28.
Will Snappy achieve its target operating income of $0.30 per tile in 2014? Show your
calculations.
SOLUTION
1. Snappy’s operating income in 2013 is as follows:
Total for
250,000 Tiles Per Unit
(1) (2) = (1) ÷ 250,000
Revenues ($4 × 250,000) $1,000,000 $4.00
Purchase cost of tiles ($3 × 250,000) 750,000 3.00
Ordering costs ($50 × 500) 25,000 0.10
Receiving and storage ($30 × 4,000) 120,000 0.48
Shipping ($40 × 1,500) 60,000 0.24
Total costs 955,000 3.82
Operating income $ 45,000 $0.18
2. Price to retailers in 2014 is 95% of 2013 price = 0.95 × $4 = $3.80; cost per tile in 2014 is
96% of 2013 cost = 0.96 × $3 = $2.88.
Snappy’s operating income in 2014 is as follows:
Total for
250,000 Tiles Per Unit
(1) (2) = (1) ÷ 250,000
Revenues ($3.80 × 250,000) $950,000 $3.80
Purchase cost of tiles ($2.88 × 250,000) 720,000 2.88
Ordering costs ($50 × 500) 25,000 0.10
Receiving and storage ($30 × 4,000) 120,000 0.48
Shipping ($40 × 1,500) 60,000 0.24
Total costs 925,000 3.70
Operating income $ 25,000 $0.10
3. Snappy’s operating income in 2014, if it makes changes in ordering and material handling,
will be as follows:
Total for
250,000 Tiles Per Unit
(1) (2) = (1) ÷ 250,000
Revenues ($3.80 × 250,000) $950,000 $3.80
Purchase cost of tiles ($2.88 × 250,000) 720,000 2.88
Ordering costs ($25 × 200) 5,000 0.02
Receiving and storage ($28 × 3,125) 87,500 0.35
Shipping ($40 × 1,500) 60,000 0.24
Total costs 872,500 3.49
Operating income $ 77,500 $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).
13-19 (20 min.) Target costs, effect of product-design changes on product costs.
Neuro Instruments uses a manufacturing costing system with one direct-cost category (direct
materials) and three indirect-cost categories:
a. Setup, production order, and materials-handling costs that vary with the number of batches
b. Manufacturing-operations costs that vary with machine-hours
c. Costs of engineering changes that vary with the number of engineering changes made
In response to competitive pressures at the end of 2012, Neuro Instruments used value-engineering
techniques to reduce manufacturing costs. Actual information for 2012 and 2013 is as follows:
