Questions 13-1 through 13-18

13–1 What is target costing? What types of firms use it?

13-1
Target costing is a method by which the firm determines the desired cost for the produ
market price, so that the firm can earn a desired profit.

13–2 Explain the two methods for reducing total product costs to achieve a desir
Which is more common in the consumer electronics industries? In the specialize
manufacturing industries?

13-2
A firm has two options for reducing costs to a target cost level:

a. Reduce costs to a target cost level by integrating new manufacturing technology, usi
management techniques such as activity-based costing, and seeking higher productivit
organization and labor relations. This method of cost reduction is common in specialize
manufacturing.

b. Reduce cost to a target cost level by redesigning a popular product. This method is
the two, because it recognizes that design decisions account for much of total product l
Exhibits 13.3 and 13.12). By careful attention to design, significant reductions in total co
approach to target costing is associated primarily with Japanese manufacturers, espec
credited with developing the method in the mid 1960s. This method of cost reduction is
electronics.

13–3 What does the term sales life cycle mean? What are the phases of the sale
differ from the cost life cycle?

13-3
The sales life cycle refers to the phase of the product’s sales in the market - from intro
decline and withdrawal from the market. In contrast, the cost life cycle refers to the ac
developing a product, designing it, manufacturing it, selling it and servicing it. The pha

Phase One: Product Introduction. In the first phase there is little competition, and sale
become aware of the new product. Costs are relatively high because of high R&D exp
setting up production facilities and marketing efforts. Prices are relatively high becaus
the high costs at this phase. Product variety is limited.

Phase Two: Growth. Sales begin to grow rapidly and product variety increases. The
decline and withdrawal from the market. In contrast, the cost life cycle refers to the ac
developing a product, designing it, manufacturing it, selling it and servicing it. The pha

Phase One: Product Introduction. In the first phase there is little competition, and sale
become aware of the new product. Costs are relatively high because of high R&D exp
setting up production facilities and marketing efforts. Prices are relatively high becaus
the high costs at this phase. Product variety is limited.

Phase Two: Growth. Sales begin to grow rapidly and product variety increases. The
benefits of differentiation. There is increasing competition and prices begin to soften.

Phase Three: Maturity. Sales continue to increase but at a decreasing rate. There is
competitors and product variety. Prices soften further, and differentiation is no longer i
based on cost, given competitive quality and functionality.

Phase Four: Decline. Sales begin to decline, as does the number of competitors. Pri
Emphasis on differentiation returns. Survivors are able to differentiate their product, c
quality and excellent service. Control of costs and an effective distribution network ar

13–4 Do pricing strategies change over the different phases of the sales life cyc

13-4
The strategic pricing approach changes over the sales life cycle of the product. In the
relatively high to recover development costs and to take advantage of product differen
for the product. In the second phase, pricing is likely to stay relatively high as the firm
the growing market. Alternatively, to maintain or increase market share at this time, re
(“penetration pricing”) might be used. In the latter phases, pricing becomes more com
life-cycle costing methods are used, as the firm becomes more of a price taker rather

13–5 Do cost management practices change over the product’s sales life cycle?

13-5
At the introduction and into the growth phases, the primary need is for value chain ana
products in a cost-efficient manner. Master budgets (Chapter 10) are also used in thes
cash flows; there are large developmental costs at a time when sales revenues are st
strategy shifts to cost leadership in the latter phases, the goal of the cost managemen
detailed budgets and activity-based costing tools for accurate cost information.
13-5
At the introduction and into the growth phases, the primary need is for value chain ana
products in a cost-efficient manner. Master budgets (Chapter 10) are also used in thes
cash flows; there are large developmental costs at a time when sales revenues are st
strategy shifts to cost leadership in the latter phases, the goal of the cost managemen
detailed budgets and activity-based costing tools for accurate cost information.

13–7 For what types of firms is target costing most appropriate and why?

13-7
Target costing is most appropriate for firms that are in a very competitive industry, so th
industry compete simultaneously on price, quality and product functionality. In very com
as this, target costing is used to determine the desired level of functionality the firm ca
while maintaining high quality and meeting the competitive price.
13–8 What is life-cycle costing? Why is it used?

13-8
Life-cycle costing considers the entire cost life cycle of the product, and thus provides
perspective of product costs and product profitability. It is used to manage the total co
across its entire life cycle. For example, design and development costs may be increa
decrease manufacturing costs and service costs later in the life cycle.

13–9 Name the five steps of the theory of constraints and explain the purpose of
most important step and why?

13-9
There are five steps in TOC analysis:

Step One: Identify the Constraint

The purpose is to identify the resource that limits production to less than market dema
aid in this step.

Step Two: Determine the Most Efficient Utilization of Each Constraint

This is basically a product mix decision: the goal is to find the most profitable product
available at the constraint.

Step Three: Maximize the Flow through the Constraint

The objective of step three is to see that all resources are coordinated to keep the con
of work-in-process inventory.
Possible ways to maximize flow through the constraint:
-reduce setups
-reduce lot sizes
-focus on throughput rather than efficiency

Step Four: Increase Capacity on the Constrained Resource

This becomes an investment decision: Invest in additional capacity if it will increase th
of the investment. Do not move to investment until steps two and three are complete,
productivity of the process through the constraint with existing capacity.

Step Five: Redesign the Manufacturing Process for Flexibility and Fast Throughput
Consider a redesign of the product of production process to achieve faster throughput
-focus on throughput rather than efficiency

Step Four: Increase Capacity on the Constrained Resource

This becomes an investment decision: Invest in additional capacity if it will increase th
of the investment. Do not move to investment until steps two and three are complete,
productivity of the process through the constraint with existing capacity.

Step Five: Redesign the Manufacturing Process for Flexibility and Fast Throughput
Consider a redesign of the product of production process to achieve faster throughput

One could argue that any step could be the most important; for example step one can
important because the analysis undertaken is intended to improve the speed of produ

13–10 What does the term constraint mean in the theory of constraint analysis?

13-10
TOC emphasizes the improvement of throughput by removing or reducing the constra
the production process that slow the rate of output. These are often identified as proc
amounts of inventory are accumulating, or where there appear to be large lead times.
accountant speeds the flow of product through the constraint, and chooses the mix of
profitability of the product flow through the constraint.

13–11 What is the role of the flow diagram in the theory of constraints analysis?

13-11
The purpose of the flow diagram is to assist the management accountant in the first st
the constraints.

13–12 What is the main difference between activity-based costing and the theory
When is it appropriate to use each one?

13-12
Activity-based costing (ABC) is used to assess the profitability of products, just as is T
that TOC takes a short-term approach to profitability analysis, while ABC develops a lo
The TOC analysis has a short-term focus because of its emphasis on materials related
13-12
Activity-based costing (ABC) is used to assess the profitability of products, just as is T
that TOC takes a short-term approach to profitability analysis, while ABC develops a lo
The TOC analysis has a short-term focus because of its emphasis on materials related
includes all product costs. On the other hand, unlike TOC, ABC does not explicitly inc
constraints and capacities of production operations. Thus, ABC cannot be used to det
best product mix. ABC and TOC are thus complementary methods; ABC provides a c
of cost drivers and accurate unit costs as a basis for strategic decisions about long-ter
mix. In contrast, TOC provides a useful method for improving the short-term profitabili
plant through short-term product mix adjustments and through attention to production

13–13 For what types of firms is the theory of constraints analysis most approp

13-13
TOC is appropriate for many types of manufacturing, service and not-for-profit firms.
product or service is prepared or provided in a sequence of inter-related activities as c
diagram such as shown in Exhibit 13-7. The most common users of TOC to date have
that use it to identify machines or steps in the production process which are bottleneck
profitability.

13–14 What are the different methods of product engineering used in product de

13-14
Product design is important in life cycle costing because the design of the product lock
costs – manufacturing, distribution and service. A well-designed product will be easy
manufacture, will have few quality defects which make it easy to sell and service, ther
costs. As shown by Exhibit 13-12, a common rule of thumb is that design locks in ap
cycle costs.

13–15 For what types of firms is life-cycle costing most appropriate and why?
13–15 For what types of firms is life-cycle costing most appropriate and why?

13-16
Strategic pricing is used to help a firm develop and implement its strategy for success
services mature in the market place. The focus for new products is typically differentia
focus on research and development, while cost control becomes more important as th
contrast, life-cycle costing is used to manage the costs of the product over its entire co
research and development and product testing to manufacturing and finally distribution

13–17 How is Takt time calculated and what is it used for?

13-17
Takt time is the ratio of available manufacturing time for a period to the units of custom
period. Each unit must be produced within the Takt time to satisfy customer demand.
for each manufacturing operation, and those operations with longer Takt times are the
manufacturing process.
13–18 Distinguish pricing based on the cost life cycle and pricing based on the s
give an example method for each.

13-18
Pricing based on the cost life cycle is a common form of pricing. It involves a markup
life cycle cost. In contrast, pricing based on the sales life cycle bases the product pric
including which phase of the sales life cycle (introduction, growth, maturity, or decline)

13–19 At what phase in the product sales life cycle will prices likely be the highe
growth, maturity, or decline?

13-19
Prices are likely to be highest in the introduction phase because costs are relatively hi
competition.
Questions 13-1 through 13-18
13–1 What is target costing? What types of firms use it?

13-1
Target costing is a method by which the firm determines the desired cost for the product, g
market price, so that the firm can earn a desired profit.

13–2 Explain the two methods for reducing total product costs to achieve a desired t
Which is more common in the consumer electronics industries? In the specialized eq
manufacturing industries?

13-2
A firm has two options for reducing costs to a target cost level:

a. Reduce costs to a target cost level by integrating new manufacturing technology, using a
management techniques such as activity-based costing, and seeking higher productivity th
organization and labor relations. This method of cost reduction is common in specialized e
manufacturing.

b. Reduce cost to a target cost level by redesigning a popular product. This method is the
the two, because it recognizes that design decisions account for much of total product life c
Exhibits 13.3 and 13.12). By careful attention to design, significant reductions in total cost a
approach to target costing is associated primarily with Japanese manufacturers, especially
credited with developing the method in the mid 1960s. This method of cost reduction is com
electronics.

13–3 What does the term sales life cycle mean? What are the phases of the sales lif
differ from the cost life cycle?

13-3
The sales life cycle refers to the phase of the product’s sales in the market - from introduc
decline and withdrawal from the market. In contrast, the cost life cycle refers to the activit
developing a product, designing it, manufacturing it, selling it and servicing it. The phases

Phase One: Product Introduction. In the first phase there is little competition, and sales ri
become aware of the new product. Costs are relatively high because of high R&D expend
setting up production facilities and marketing efforts. Prices are relatively high because of
the high costs at this phase. Product variety is limited.

Phase Two: Growth. Sales begin to grow rapidly and product variety increases. The prod
decline and withdrawal from the market. In contrast, the cost life cycle refers to the activit
developing a product, designing it, manufacturing it, selling it and servicing it. The phases

Phase One: Product Introduction. In the first phase there is little competition, and sales ri
become aware of the new product. Costs are relatively high because of high R&D expend
setting up production facilities and marketing efforts. Prices are relatively high because of
the high costs at this phase. Product variety is limited.

Phase Two: Growth. Sales begin to grow rapidly and product variety increases. The prod
benefits of differentiation. There is increasing competition and prices begin to soften.

Phase Three: Maturity. Sales continue to increase but at a decreasing rate. There is a re
competitors and product variety. Prices soften further, and differentiation is no longer impo
based on cost, given competitive quality and functionality.

Phase Four: Decline. Sales begin to decline, as does the number of competitors. Prices
Emphasis on differentiation returns. Survivors are able to differentiate their product, contr
quality and excellent service. Control of costs and an effective distribution network are ke

13–4 Do pricing strategies change over the different phases of the sales life cycle?

13-4
The strategic pricing approach changes over the sales life cycle of the product. In the first
relatively high to recover development costs and to take advantage of product differentiati
for the product. In the second phase, pricing is likely to stay relatively high as the firm atte
the growing market. Alternatively, to maintain or increase market share at this time, relativ
(“penetration pricing”) might be used. In the latter phases, pricing becomes more competit
life-cycle costing methods are used, as the firm becomes more of a price taker rather than

13–5 Do cost management practices change over the product’s sales life cycle? Ex

13-5
At the introduction and into the growth phases, the primary need is for value chain analysi
products in a cost-efficient manner. Master budgets (Chapter 10) are also used in these e
cash flows; there are large developmental costs at a time when sales revenues are still re
strategy shifts to cost leadership in the latter phases, the goal of the cost management sy
detailed budgets and activity-based costing tools for accurate cost information.
13-5
At the introduction and into the growth phases, the primary need is for value chain analysi
products in a cost-efficient manner. Master budgets (Chapter 10) are also used in these e
cash flows; there are large developmental costs at a time when sales revenues are still re
strategy shifts to cost leadership in the latter phases, the goal of the cost management sy
detailed budgets and activity-based costing tools for accurate cost information.

13–6 What does the concept of value engineering mean? How is it used in target co

13-6
Value engineering is used in target costing to reduce product cost by analyzing the tradeo
and levels of product functionality and total product cost. There are two common forms of

1) Design analysis is a process where the design team prepares several possible designs
having similar features but different levels of performance on these features and different

2) Functional analysis is a process where each major function or feature of the product is
performance and cost. Group technology is a method of identifying similarities in the parts
manufactures so the same part can be used in two or more products, thereby reducing co
engineering, or simultaneous engineering, is an important method that integrates product
and marketing throughout the product’s life cycle. Value engineering is important in targe
identifies the options for product design that can then be evaluated in terms of desirability
manufacturing cost, as a means for coming up with the best design that satisfies custome
target cost.

13–7 For what types of firms is target costing most appropriate and why?

13-7
Target costing is most appropriate for firms that are in a very competitive industry, so that t
industry compete simultaneously on price, quality and product functionality. In very compe
as this, target costing is used to determine the desired level of functionality the firm can off
while maintaining high quality and meeting the competitive price.
13–8 What is life-cycle costing? Why is it used?

13-8
Life-cycle costing considers the entire cost life cycle of the product, and thus provides a m
perspective of product costs and product profitability. It is used to manage the total costs o
across its entire life cycle. For example, design and development costs may be increased
decrease manufacturing costs and service costs later in the life cycle.

13–9 Name the five steps of the theory of constraints and explain the purpose of eac
most important step and why?

13-9
There are five steps in TOC analysis:

Step One: Identify the Constraint

The purpose is to identify the resource that limits production to less than market demand.
aid in this step.

Step Two: Determine the Most Efficient Utilization of Each Constraint

This is basically a product mix decision: the goal is to find the most profitable product mix
available at the constraint.

Step Three: Maximize the Flow through the Constraint

The objective of step three is to see that all resources are coordinated to keep the constra
of work-in-process inventory.
Possible ways to maximize flow through the constraint:
-reduce setups
-reduce lot sizes
-focus on throughput rather than efficiency

Step Four: Increase Capacity on the Constrained Resource

This becomes an investment decision: Invest in additional capacity if it will increase throug
of the investment. Do not move to investment until steps two and three are complete, that
productivity of the process through the constraint with existing capacity.

Step Five: Redesign the Manufacturing Process for Flexibility and Fast Throughput
Consider a redesign of the product of production process to achieve faster throughput.
-focus on throughput rather than efficiency

Step Four: Increase Capacity on the Constrained Resource

This becomes an investment decision: Invest in additional capacity if it will increase throug
of the investment. Do not move to investment until steps two and three are complete, that
productivity of the process through the constraint with existing capacity.

Step Five: Redesign the Manufacturing Process for Flexibility and Fast Throughput
Consider a redesign of the product of production process to achieve faster throughput.

One could argue that any step could be the most important; for example step one can be
important because the analysis undertaken is intended to improve the speed of product flo

13–10 What does the term constraint mean in the theory of constraint analysis?

13-10
TOC emphasizes the improvement of throughput by removing or reducing the constraints
the production process that slow the rate of output. These are often identified as process
amounts of inventory are accumulating, or where there appear to be large lead times. Usi
accountant speeds the flow of product through the constraint, and chooses the mix of prod
profitability of the product flow through the constraint.

13–11 What is the role of the flow diagram in the theory of constraints analysis?

13-11
The purpose of the flow diagram is to assist the management accountant in the first step o
the constraints.

13–12 What is the main difference between activity-based costing and the theory of
When is it appropriate to use each one?

13-12
Activity-based costing (ABC) is used to assess the profitability of products, just as is TOC.
that TOC takes a short-term approach to profitability analysis, while ABC develops a longe
The TOC analysis has a short-term focus because of its emphasis on materials related co
13-12
Activity-based costing (ABC) is used to assess the profitability of products, just as is TOC.
that TOC takes a short-term approach to profitability analysis, while ABC develops a longe
The TOC analysis has a short-term focus because of its emphasis on materials related co
includes all product costs. On the other hand, unlike TOC, ABC does not explicitly include
constraints and capacities of production operations. Thus, ABC cannot be used to determ
best product mix. ABC and TOC are thus complementary methods; ABC provides a comp
of cost drivers and accurate unit costs as a basis for strategic decisions about long-term p
mix. In contrast, TOC provides a useful method for improving the short-term profitability o
plant through short-term product mix adjustments and through attention to production bottl

13–13 For what types of firms is the theory of constraints analysis most appropriate

13-13
TOC is appropriate for many types of manufacturing, service and not-for-profit firms. It is
product or service is prepared or provided in a sequence of inter-related activities as can b
diagram such as shown in Exhibit 13-7. The most common users of TOC to date have be
that use it to identify machines or steps in the production process which are bottlenecks in
profitability.

13–14 What are the different methods of product engineering used in product desig

13-14
Product design is important in life cycle costing because the design of the product locks in
costs – manufacturing, distribution and service. A well-designed product will be easy and
manufacture, will have few quality defects which make it easy to sell and service, thereby
costs. As shown by Exhibit 13-12, a common rule of thumb is that design locks in approx
cycle costs.

13–15 For what types of firms is life-cycle costing most appropriate and why?
13–15 For what types of firms is life-cycle costing most appropriate and why?

13-15
Life-cycle costing is most appropriate for firms that have high upstream costs (i.e. design
high downstream costs (i.e. distribution and service costs). Firms with high upstream and
manage the entire life cycle of costs, including the upstream and downstream costs as we
Traditional cost management methods tend to focus on manufacturing costs only, and for
would ignore a significant portion of the total costs.

13–16 Explain the difference in intended application between strategic pricing and l

13-16
Strategic pricing is used to help a firm develop and implement its strategy for success as i
services mature in the market place. The focus for new products is typically differentiation
focus on research and development, while cost control becomes more important as the pr
contrast, life-cycle costing is used to manage the costs of the product over its entire cost li
research and development and product testing to manufacturing and finally distribution an

13–17 How is Takt time calculated and what is it used for?

13-17
Takt time is the ratio of available manufacturing time for a period to the units of customer d
period. Each unit must be produced within the Takt time to satisfy customer demand. Ta
for each manufacturing operation, and those operations with longer Takt times are the con
manufacturing process.
13–18 Distinguish pricing based on the cost life cycle and pricing based on the sale
give an example method for each.

13-18
Pricing based on the cost life cycle is a common form of pricing. It involves a markup on f
life cycle cost. In contrast, pricing based on the sales life cycle bases the product price o
including which phase of the sales life cycle (introduction, growth, maturity, or decline) the

13–19 At what phase in the product sales life cycle will prices likely be the highest:
growth, maturity, or decline?

13-19
Prices are likely to be highest in the introduction phase because costs are relatively high a
competition.
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Brief Exercises 13-20 through 13-27
13–20 The market price for a product has been $50 per unit, but competitive pre
the market price to $45. The firm manufactures 10,000 of these products per yea
cost of $38 per unit (including $22 fixed cost and $16 variable cost per unit). Ot
administrative costs for the product are $ 8 per unit. What is the firm’s target co

13-20
Current profit per unit = $50 - $ 38 - $8 = $4 per unit
Target total cost = $45 - $4 = $41
Target manufacturing cost = $45 - $4 - $8 = $33
Alternatively, Target total cost less selling and administrative expenses
= 41-8 = 33

13–21 The firm in 13-20 above ignores competitive prices because it has a differ
uses full cost based pricing with a 40% markup. What is the firm’s price?

13-21
Price = 1.4 × ($38) = $53.20

13–22 The firm in 13-20 above ignores competitive prices because it has a differ
uses cost life cycle based pricing with a 10% markup. What is the firm’s price?

13-22
Price = 1.10 × ($38 + $8) = $50.60

13–23 If customer demand is 200,000 units per month, and available manufactur
hours per week, what is the Takt time for this firm?

13-23
Takt time = 6,000 × 4 weeks per month ÷ 200,000 units/month = .12 hour/unit
or 7.2 minutes per unit
13-23
Takt time = 6,000 × 4 weeks per month ÷ 200,000 units/month = .12 hour/unit
or 7.2 minutes per unit

13-24
20 days: May 1 to May 20

13–25 If Toyota Motor Company receives an order on May 1, begins production o

the order on May 20, immediately following production, the manufacturing cycle
ratio is _____.

13-25
2 days in production (May 19 to May 20) ÷ 20 day cycle time (May 1 to May 20)
= 2 ÷ 20 = .1

13–26 Comdex Inc manufactures parts for the telecom industry. One of its prod
sells for $160 is now facing a new competitor that offers the same product at $1
currently costs Comdex $130. Comdex believes it must reduce its price to $150
competitive. What is the target cost of the product if Comdex desires a 25% pro

13-26
$140 – ($140 × .25) = $105
13-27
In a Business Week Online News Brief, November 7, 2007, a study is reported that sh
of the Orlando theme parks seek variety. They are in Orlando for fun, and variety is p
know that most who come to Orlando will visit two or more of the parks, and they have
incentive to compete on price. The parks are most likely using a full cost + ROI techn
large and continual investments in plant and intense studies of attendance numbers t
many factors such as fuel costs for travel, the economy, weather, etc.
Brief Exercises 13-20 through 13-27
13–20 The market price for a product has been $50 per unit, but competitive pressur
the market price to $45. The firm manufactures 10,000 of these products per year at
cost of $38 per unit (including $22 fixed cost and $16 variable cost per unit). Other
administrative costs for the product are $ 8 per unit. What is the firm’s target cost f

13-20
Current profit per unit = $50 - $ 38 - $8 = $4 per unit
Target total cost = $45 - $4 = $41
Target manufacturing cost = $45 - $4 - $8 = $33
Alternatively, Target total cost less selling and administrative expenses
= 41-8 = 33

13–21 The firm in 13-20 above ignores competitive prices because it has a differenti
uses full cost based pricing with a 40% markup. What is the firm’s price?

13-21
Price = 1.4 × ($38) = $53.20

13–22 The firm in 13-20 above ignores competitive prices because it has a differenti
uses cost life cycle based pricing with a 10% markup. What is the firm’s price?

13-22
Price = 1.10 × ($38 + $8) = $50.60

13–23 If customer demand is 200,000 units per month, and available manufacturing
hours per week, what is the Takt time for this firm?

13-23
Takt time = 6,000 × 4 weeks per month ÷ 200,000 units/month = .12 hour/unit
or 7.2 minutes per unit
13-23
Takt time = 6,000 × 4 weeks per month ÷ 200,000 units/month = .12 hour/unit
or 7.2 minutes per unit

13–24 If a customer order is placed on May 1 and the company expects to begin pr
May 10, and the order is shipped on May 20, the cycle time is ___ days.

13-24
20 days: May 1 to May 20

13–25 If Toyota Motor Company receives an order on May 1, begins production on M

the order on May 20, immediately following production, the manufacturing cycle eff
ratio is _____.

13-25
2 days in production (May 19 to May 20) ÷ 20 day cycle time (May 1 to May 20)
= 2 ÷ 20 = .1

13–26 Comdex Inc manufactures parts for the telecom industry. One of its product
sells for $160 is now facing a new competitor that offers the same product at $150.
currently costs Comdex $130. Comdex believes it must reduce its price to $150 to re
competitive. What is the target cost of the product if Comdex desires a 25% profit o

13-26
$140 – ($140 × .25) = $105

13–27 Why do prices at Orland’s theme parks remain high despite seasonal and eco
ups and downs? What type of strategic pricing is used by these theme parks?
13–27 Why do prices at Orland’s theme parks remain high despite seasonal and eco
ups and downs? What type of strategic pricing is used by these theme parks?

13-27
In a Business Week Online News Brief, November 7, 2007, a study is reported that shows
of the Orlando theme parks seek variety. They are in Orlando for fun, and variety is part
know that most who come to Orlando will visit two or more of the parks, and they have the
incentive to compete on price. The parks are most likely using a full cost + ROI technique
large and continual investments in plant and intense studies of attendance numbers that a
many factors such as fuel costs for travel, the economy, weather, etc.
 Solution (15 min)

Competitive price $550.00

Current Profit per unit $61.40

New target cost (to meet competitve price) $488.60

2. The target cost can probably be achieved by efforts in two areas:

a. The analysis of budgeted versus actual cost shows an unfavorable materials variance of
$500,000 ($7,000,000 - $6,500,000) or $20 per unit, which is a very significant variance. Efforts
to reduce or eliminate this variance will make the firm much more competitive. Notice that the
labor usage variance for indirect labor is favorable, and the direct labor variance is unfavorable. It
may be that additional work is needed setting the standards.

b. The standard cost shows an unfavorable direct labor variance of $125,000 ($2,625,000 -
$2,500,000), or $5 per unit, an opportunity for cost savings.

c. The remaining manufacturing costs can be considered non-value adding costs, since they do
not add to the functionality or quality of the product. Efforts can be made to reduce the total cost
of these manufacturing costs, which now total a significant $4,090,000 or $163.60 per unit. Note
that inspection and return and rework costs are also over budget; not only are these costs non-
value adding, they are also increasing above the budget, a strong sign that Kaizen methods
should be employed.
 Required
Calculate the product cost and product margin for each product.
A new competitor has entered the market for lens-polishing equipment with a superior product at
significantly lower prices, $825 for the A-10 model and $595 for the A-25 model. To try to compete,
BSI has made some radical improvements in the design and manufacturing of its two products.
The materials costs and the activity usage rates have been decreased significantly.
Calculate the total product costs with the new activity usage data.
Can BSI make a positive gross margin with the new costs, assuming that it must meet the price set
by the new competitor?

Assume the information in requirement 2, but that BSI management is not satisfied with the gross
margin on the A-10 after the cost improvements. BSI wants a $50 gross margin on A-10. Suppose
you are able to change the number of parts to reduce costs further to achieve the desired $50
margin.
How much would the number of parts have to change to provide the desired gross margin? [Hint:
Use an Excel spreadsheet, and use the Goal Seek function].
What cost management method might be useful to BSI at this time, and why?

Solution (30 min)

1 and 2:

Activity-based Costs
A-10 A-25 A-10 A25
Direct Materials $ 143.76 $ 66.44 $ 78.65 $ 42.45
Materials Handling $ 272.25 $ 207.00 $ 247.50 $ 182.25
Mfg Supervision $ 141.00 $ 94.00 $ 117.50 $ 47.00
Assembly $ 308.55 $ 234.60 $ 280.50 $ 206.55
Set-ups $ 89.20 $ 44.60 $ 44.60 $ 44.60
Inspection and Test $ 35.00 $ 21.00 $ 35.00 $ 17.50
Packaging $ 10.50 $ 6.00 $ 10.50 $ 3.00
Total $ 1,000.26 $ 673.64 $ 814.25 $ 543.35

Price $ 1,050.00 $ 725.00 $ 825.00 $ 595.00

Margin $ 49.74 $ 51.36 $ 10.75 $ 51.65

3. The solution uses Goal Seek or trials in the Excel sheet. The number of parts must be reduced
to 101 or fewer to get at least $50 margin.

4. Target costing should be useful to BSI to assist the firm in meeting the new competition by
finding new ways to cut costs without reducing product quality or functionality.
 Required
1. What are the current profit margins on both trips?
2. Take-a-Break’s management believes that it must drop the price on the Cancun trip to $710 and on
the Jamaica trip to $650 in order to remain competitive in the market. Recalculate profit margins for both
packages at these price levels.
3. Describe two ways that Take-a-Break Travel could cut its costs to get the profit margin back to their
original levels.

Solution (20 min)

1.
Package Specifications COST Unit Cost Qty Cancun Qty Jamaica
Oceanfront room; number of nights 30 6 $180 4 $120
Meals:
Breakfasts 5 7 $35 5 $25
Lunches 7 7 $49 5 $35
Dinners 10 6 $60 0 $0
Scuba diving trips 15 4 $60 2 $30
Water skiing trips 10 5 $50 2 $20
Airfare (round trip from Miami - Cancun) 1 $175
Airfare (round trip from Miami - Jamaica 1 $250
Transportation to and from airport Cancun 1 $15
Transportation to and from airport Jamaica 1 $10
$624 $490

1 & 2. Package Specification Margins Cancun Jamaica

Old Price $750 $690
Costs $624 $490
Margin $126 $200
Margin ÷ Price 16.8% 29.0%
New price $710 $650
Costs $624 $490
Margin $86 $160
Margin ÷ Price 12.1% 24.6%

3. The airfare costs are the largest component of cost and this category could have room for
improvement. By further negotiating group discount rates or searching for lower cost discount
carriers, Take-a-Break could try lower its cost in this category, possibly by having the package not
include any per bag fees charged by the airline, letting the purchaser bear the cost.

Room costs also comprise a major portion of total package costs. While Take-a-Break could
negotiate deals with off-beachfront hotels or opt for non-oceanfront rooms, this might decrease
the value of the trip in the eyes of its customers. A better option would be to further negotiate
group rates with its current hotel providers.
 Required
Using the information Rick has developed, determine the importance index for each component (menu
and food preparation, wait staff, and food ingredients).
Compare your findings in Part 1 to the relative cost of the components. What conclusions can you draw
from this comparison?

Solution (20 min)

1. The calculations/steps are shown below:

Fourth: Determine Importance Index for Each Component

Customer Criteria
Taste Comfort Enjoyment Importance
Relative importance of criteria 15.0% 31.7% 53.3% Index
The % contribution of each
component to each customer
criterion:
Menu and food prep 30% 20% 45% 34.83%
Wait staff 30% 60% 35% 42.17%
Food ingredients 40% 20% 20% 23.00%
Total 100% 100% 100% 100%

Fifth: Compare Relative Importance to Relative Cost for Each Component

Importance Relative
Components Index Cost Ratio
Menu and food prep 34.83% 30.77% 1.13
Wait staff 42.17% 46.15% 0.91
Food ingredients 23.00% 23.08% 1.00
Total 100.00% 100.0%

2. The cost index for menu and food preparation is low relative to the importance index, which
indicates that Rick should consider spending more time and cost on this activity. In contrast, the
cost index for wait staff is somewhat higher than the importance index, which indicates that Rick
should consider decreasing the resources applied to wait staff. Finally, customer satisfaction
appears to reward the level of expenditure for food ingredients.
 Solution (20 min)

MCE = total processing time/total cycle time

= 24/(24+2+6+3+1+5+2+6+2) = 24/51 = 47.1%

Note that new product development time and order taking time are not considered
part of the manufacturing cycle and are excluded from cycle time.

The level of MCE is best interpreted by reference to the prior MCE values for the
firm or to an industry average. A number closer to one is better. When comparing
to an industry average, management should make sure that the measures are
calculated in the same manner. In this case, Waymouth has improved significantly
on its MCE relative to the prior data, and is higher than the industry average.
 Solution (10 min)

1. The Takt time for this product is the number of available hours ÷ total demand.

Total Manufacturing time 252,000 sec

Seconds per unit 30 sec

The processing line is not properly balanced. Operation 5 exceeds Takt time by 4 sec. and
Operation 2’s time is much less than Takt time. To balance the line, so that products can be
expected to come off the line every 30 seconds as needed, the capacity of operation 5 should be
increased so that it could speed up its operation. Similarly, operation 2 could reduce capacity
and resources to save money; we do not need this operation to move so fast.

The strategic role of Takt time is to help operations managers to balance the operations and to
improve the speed of throughput and reduce cycle time. The management accountant’s role is to
provide information on the costs of processing time and capacity, and the value of increasing
throughput. TOC analysis attempts to accomplish this by maximizing the flow through the
constraints/operations.
 Solution (10 min)

Life cycle costing can be used in the cost management of the IT department (or other service
departments) over the life cycle of the department’s assets. This is also called the management
of the “total cost of ownership” of the assets. The idea here is that the total cost of the IT
department is represented by many different elements, including assets, personnel,
management, and other costs.

As the strategic goals of the organization change, the focus on different phases of the IT life cycle
can change. For example, when the organization experiences significant growth, the acquisition
of new assets in phases one and two is accelerated. At other times, the need for increased
focus on user support is important, as the firm faces challenges in introducing new organizational
plans or management structures. The overall goal of taking a life cycle view of IT is to realize
that the total cost of the service department is made up of significantly different components,
assets, personnel and management, which relate to the different phases of the life cycle. At
times, the focus will change from one phase to another. Also, the life cycle view provides an
important new forward-looking view – how will the costs of IT change in the future as the
organization grows or changes strategic direction? What will be the effect of an unexpected loss
of data or processing capability, and how can these unexpected events be prevented to reduce
the overall cost of IT?
 Required
Determine the price for the part using a markup of 45 percent of full manufacturing cost.
Determine the price for the part using a markup of 25 percent of full life-cycle cost.
Determine the price for the part using a desired gross margin percentage to sales of 40 percent.
Determine the price for the part using a desired life-cycle cost percentage to sales of 25 percent.
Determine the price for the part using a desired before-tax return on investment of 15 percent.
Determine the contribution margin and operating profit for each of the methods in requirements 1
through 5. Which price would you choose, and why?

Solution (25 min)

The price, contribution, and profit information is as follows.

1. $214.190 = $7,385,875 × 1.45 ÷ 50,000
2. $222.926 = $8,917,020 × 1.25 ÷ 50,000
3. $246.196 = $147.72 ÷ (1 - .4)
4. $237.787 = $178.34 ÷ (1 - .25)
5. $245.390 = $178.34 × (1 + .3760)
Where: .3760 = ($22,350,000×.15) ÷ (50,000 × $178.34)

Total Costs
Variable Manufacturing $ 4,680,000
Variable Selling and Administrative 855,650
Plant-level Fixed Overhead 2,345,875
Fixed Selling and Administrative 675,495
Batch-level Fixed Overhead 360,000
Total Investment in Product Line 22,350,000
Expected Sales (units) 50,000

Total Variable Costs $ 5,535,650 = $ 4,680,000 + 855,650

Total Fixed Costs 3,381,370 = 2,345,875 + 675,495
Total Manufacturing Cost 7,385,875 = $ 4,680,000 + 2,345,875
Total Selling and Administrative 1,531,145 = 855,650 + 675,495
Total Life Cycle Cost 8,917,020 = 7,385,875 + 1,531,145
Per unit Manufacturing Cost 147.72 = 7,385,875 ÷ 50,000
Per unit Life Cycle Cost 178.34 = 7,385,875 + 1,531,145

Desired Rate Contribution

Method: for Markup Price Margin*
Markup on full manufacturing cost 45% $ 214.190 $ 5,173,900
Markup on life cycle costs 25% 222.926 $ 5,610,650
Price to Achieve Desired GM % 40.00% 246.196 $ 6,774,150
Price to Achieve Desired LCC % 25.00% 237.787 $ 6,353,750
Price to Achieve Desired ROA of 15% 37.60% 245.390 $ 6,733,850

* uses rounding of price to 3 significant digits

based on meeting contract deadlines and meeting or exceeding other contract performance measures.
A recent Pentagon contract with Boeing involves a 10% fixed fee on cost incurred and another 5 percent
of incentive award.

Required

Evaluate the compensation plan for this contract, with the fixed fee of 10 percent and the incentive fee
of 5 percent. What do you think is the role of the incentive fee, and do you think it is too large or too
small?

Solution (10 min)

This is a complex issue which Pentagon officers and congressional leaders continue to squabble
over. In this particular case, Senator McCain argued that the contract should be re-written to
reduce the fixed fee from 10% to 3% and the incentive fee should be increased from 5% to 12%.
This means that the total potential fee of 15% would be retained, but that a much larger portion of
the fee would have to be earned on performance measures (the incentive fee).

As for whether the performance fee is too low or too high is a matter of perspective. While
Congress might think the old 5% incentive was too low, contractors might think the new 12%
incentive fee is too big a proportion of the overall potential fee.

Source: “The Right Stuff for the GIs of the Future,” Business Week, August 15, 2005, pp 74-75.
Quality Craft Rentals began business three years ago with a $21,000 expenditure for a fleet of 30
canoes. These are expected to last seven more years, at which time a new fleet must be purchased.
Required
Matt is happy with the steady rental average of 6,400 per year. For this number of rentals, what price
should be charged per rental for the business to make a 20 percent life-cycle return on investment?

Target Life-Cycle ROI 20.00%

Annual rentals 6,400

Solution (20 min)

Total Fixed Costs $44,620 ($2,300 + $3,000 + $5,400 + $6,900 + $6,000 + $21,000)
Total Variable Costs $3.50 ($2.50 + $0.50 + $0.50)
Life Cycle costs $691,200 ($21,000 + $446,200 + $224,000)
Life cycle revenues $864,000 ($3.50 × 6,400 × 10 years) ÷ (0.80)
Price per rental $13.50 ($864,000 ÷ 64,000 rentals over ten years)

Calculations for the above:

Life-Cycle Costs =
$ 21,000 for fleet of canoes
446,200 (annual fixed costs × 10 years)
224,000 ($3.50 var. costs × 6,400 rentals per yr × 10 years)
$691,200

Life-Cycle Revenues needed for 20% profit margin = $691,200 ÷ 0.80 = $864,000

Price per Rental for 20% profit margin = $864,000 ÷ 64,000 rentals in ten years =
$13.50
 Required

What are the current profit margins on both systems?

UR Safe's management believes that it must drop the price on the ICU 100 unit to $750 and n the ICU
900 unit to $1,390 to remain competitive in the market. Recalculate profit margins for both products at
these price levels.
Describe two ways that UR Safe could cut its costs to get the profit margins back to their original on
both systems.

Solution (20 min)

1. Cost and profit-margin information on products:

ICU 100 ICU 900

Video cameras $150 $450
Video monitors $75 $75
Motion detectors $75 $120
Floodlights $24 $56
Alarms $15 $30
Wiring (ft) $70 $110
Installation (hrs) $320 $520
TOTAL $729 $1,361
Profit $81 $159
Profit Margin 10.0% 10.46%

2. Recalculated profit margins:

Revised selling prices per unit (given) = $750 $1,390

Total cost per unit (part 1 above) = $729 $1,361
Profit, per unit = $21 $29

Profit margin percentage = 2.80% 2.09%

3. The installation costs are the largest component of cost and this category could have room for
improvement. By redesigning the layout of the systems or finding components that integrate
more readily, the installation times could then be reduced. Also, costs could be lowered by
contractual bargaining with electricians to reduce the per hour rates for installation.

The video equipment and motion detectors are sources of significant costs, but decreasing the
quality or quantity of these items would substantially change the effectiveness and value of the
security systems.
 G & A Expense $225 $175 $50
Total Cost $1,425 $1,210 $215

The cost savings of $215 are not sufficient to get the product total cost ($1,210) down to the
desired target cost of $1,200. Given that National might be willing to pay a higher price, and
since the cost difference is relatively small, it seems that Morrow should in fact pursue the
order. Here are some other considerations:

a. Morrow should consider the short versus the long term issues of taking on the order. In the
short term, as noted in chapter 3, the fixed costs of manufacturing the order will not change and
therefore can be considered irrelevant for the order if it is a one time special order. Thus, for a
short term analysis, Morrow should determine that portion of manufacturing, marketing, and
GSA costs that are fixed and exclude them from the analysis. In contrast, if Morrow expects
this to be a regular customer, that Morrow will be supplying National these parts for several
months or years, then the total costs including fixed costs are relevant, as in the calculations
above. In the longer term, Morrow must cover all costs of production and sale, while in the
short term only the variable costs are relevant.

b. Morrow appears to compete in what Robin Cooper calls the “confrontation” strategy (When
Lean Enterprises Collide, Harvard Business School Press, 1995) wherein each competitor must
simultaneously compete on the basis of price, quality and functionality. In Morrrow’s case,
functionality refers not only to meeting product specifications but also to “delighting” the
customer with meeting delivery times, reducing lead times, and minimizing billing and shipping
errors, as Morrow has done. In a “confrontation” type of competition, target costing is
particularly valuable, as Cooper points out, because it provides the firm a mechanism for
balancing, and choosing the proper “bundle” of the three aspects of competition: price, quality
and functionality. For example, to be most competitive, Morrow must spend extra dollars to
ensure that there are few if any billing and shipping errors, while at the same time reducing the
costs of manufacturing the product, and maintaining or improving product quality.

c. The problem notes that the manufacturing costs are “standard” full costs. Since the costs
are given at standard, this means that there are no apparent inefficiencies reflected in the
reported $1,425. However, the question still remains whether the standard costs are properly
determined. Should the standards be revised?
 Calculate the target cost required for VIP-MD to maintain its current market share and profit
for enrollment in 2013.
Costs in the health care industry applicable to VIP-MD and Doctors Nationwide are
expected to increase by 6% in the coming year, 2014. VIP-MD is planning for the year
ahead and is expecting all providers, including VIP-MD and Doctors Nationwide, to
increase their rates by $15, to $340. Calculate the new target cost assuming again that
VIP-MD wants to maintain the same profit per enrollee as in 2013.
Identify the critical success factors for VIP-MD. How can the HMO maintain it’s market
share?

Solution (20 min)

1. The unit cost = $77,817,500 ÷ 915,500 = $256.07

The current profit per contract issued = $368 - $256.07 = $111.93

Therefore, the target cost (TC) to meet the competitive price = $325 - $111.93 = $213.068

Projected Average
Age Enrollment in Monthly Cost in
Enrollment in 2013 2014 2013

1 to 4 45,688 48,977 $ 11,147,872

5 to 14 82,456 84,663 10,059,632
15 to 19 95,873 95,887 8,436,824
20 to 24 66,246 67,882 9,539,424
25 to 34 133,496 132,554 26,432,208
35 to 44 166,876 175,446 38,882,108
45 to 54 85,496 90,889 22,741,936
55 to 64 99,624 101,923 28,691,712
65 to 74 156,288 161,559 48,918,144
75 to 84 67,895 72,465 33,132,760
85 years and older 23,499 26,849 24,086,475
TOTAL 1,023,437 1,059,094 $262,069,095
1,023,437
Average Cost $ 256.068
 Required

Caldwell has estimated that it can reduce the number for purchasing orders to 680 and can
decrease the cost of each shipment $3 with minor changes in its operations. Any further cost
savings must come from reengineering the warehousing processes. What is the maximum
cost (i.e., the target cost) for warehousing activities if the firm desires to earn the same
amount of profit next year?

Solution (20 min)

New number of purchase orders 680

decrease in shipping costs $ 3

Current Year Operating Income

Sales ($20 x 100,000) = $2,000,000
Costs:
Purchase ($10 x 100,000) $1,000,000
Purchasing order (150 x $1,000) $150,000
Warehousing ($30 x 8,000) $240,000
Distributing ($80 x 500) $40,000
Fixed operating cost $ 250,000 $1,680,000
Operating income $320,000

Determination of Target Cost:

Sales ($20.00 x 100,000 x 0.90) $1,800,000
Desired profit (given) $320,000
Costs:
Purchase (2% discount) $980,000
Purchasing order ($150 × 680) $102,000
Distributing ($77 × 500) $38,500
Fixed operating cost $250,000 $1,370,500
Maximum allowable costs for warehousing $109,500

Warehousing costs must be reduced from $240,000 to $109,500, a reduction of $130,500.

 Required
What is the target manufacturing cost for shoes to be sold in the United States?
Which features, if any, should Harpers add for shoes to be sold in the United States?
Strategically evaluate Harpers’ decision to begin selling shoes in the United States.

Solution (20 min)

1. Target manufacturing cost = Current manufacturing cost + "U.S. Differential"

= $56.00 + Price differential - Cost differential
= $56.00 + $16.00 - $10.00 = $62.00 per unit

Or, Target cost = Target selling price - differential advertising & shipping costs + Desired U.S. profit
= $90.00 - $10.00 - $18.00 = $62.00 per unit

2. The cost differential = $62.00 - $56.00 = $6.00 per unit

Harpers cannot add the lighter weight feature, though it is the most desired, as the cost of
$6.75 is greater than the cost differential of $6. The best approach might be to add the extra-
soft insole ($3) and the longer-wearing sole ($3).

3. Strategically, the decision to sell shoes in the United States makes very good sense. To
compete effectively in a competitive global market such as shoes, a firm has to have an
effective presence in all the key markets, which would include the United States. The
experience of competing in the United States should bring profits (due to the higher prices)
and the knowledge obtained from dealing with the different customers. This knowledge can be
used to improve the firm’s competitiveness in other markets.

Note: the currency exchange rate used in the problem is based on the exchange rate of
$1.6523/ £ but the actual exchange rate varies on a daily basis.
Required

Using the information in Table 2 developed by the team of engineers and sales managers,
together with the customer criteria, determine which components of the boat are most
important to customers, and why.
Take your findings in requirement 1 and compare them against the target cost figures in
Table 1. What conclusions can you draw from this comparison?

Solution (30 min)

Criteria Customer Rating

Safety 33
Styling 15
Performance 20
Comfort 32
100

Components Target Cost Percent

Hull and Keel $ 36,000 30%
Standing Rig 18,000 15%
Sails 20,000 17%
Electrical 16,000 13%
Other 30,000 25%
$ 120,000 100%

Component/
Criteria Safety Styling Performance Comfort
Hull and Keel 30% 40% 50% 30%
Standing Rig 30% 20% 20% 10%
Sails 10% 10% 30% 10%
Electrical 20% 10%
Other 10% 20% 50%
100% 100% 100% 100%

Component/ Value
Criteria Safety Styling Performance Comfort Index
Criteria Value 33.0% 15.0% 20.0% 32.0% 100.0%
Hull and Keel 9.9% 6.0% 10.0% 9.6% 35.5%
Required
Determine which activities are most valuable to the wedding couple, and compare this finding to
the cost of the activities. Which activities should be given greater attention in time and cost, and
which should be given less time and cost?
Indicate some business and competitive issues that should be taken in account in considering
your answer to part 1 above.

Solution (30 min)

The QFD analysis shows that BPI should consider spending more time and money on the
planning meeting and less on the photography done the day of the wedding, to put their costs
more in line with the customer criteria.
 Required
What is the most profitable production plan for Colton? Explain your answer with supporting calculations.
How would you apply the five steps of the Theory of Constraints (TOC) to Colton’s manufacturing operations?

Solution (30 min)

TOC Solution Spreadsheet

Products Name Demand Price Materials Cost

First Table 400 $250.00 $100.00
Second Sofa 150 $450.00 $250.00

Time Req'd for Each Product Time (hrs.)

Activity Table Sofa Available
Cut lumber 0.50 0.20 280 (2 × 35 × 4)
Sand 0.50 0.50 280 (2 × 35 × 4)
Assemble 0.75 1.50 700 (given)
Stain 0.80 0.30 280 (2 × 35 × 4)
Cut fabric 0.00 0.80 140 (1 × 35 × 4)

Part One: Identify the Constraint

Total Time Required for Each activity for Given Deman

Time Slack
Table Sofa Total Time Available Time
Cut lumber 200 30 230 280 50
Sand 200 75 275 280 5
Assemble 300 225 525 700 175
Stain 320 45 365 280 (85)
Cut fabric 0 120 120 140 20

Part Two: Identify Most Profitable Product

Table Sofa
Price $250 $450
Materials Cost $100 $250
Throughput Margin $150 $200
Constraint time (staining) 0.80 0.30
Throughput/hour $187.50 $666.67

Part Three: Identify Most Profitable Product Mix

Finally, determine the most profitable product mix. Since sofas are the most profitable through the
staining constraint, we fill the sofa demand first, and then with the remaining staining capacity, fill
as much of the table demand as possible. See below for calculations.

Table Sofa
Demand 400 150
Production of Sofas 150
Availability, Usage of Staining hours 235 45 280
Production of Tables 293
Throughput/unit (see above) $150.00 $200.00
Total Throughput $43,950 $30,000 $73,950

2. Part one above solves the first two steps of the TOC, to identify the constraint and determine
the most profitable product mix. The third step, to maximize flow through the constraint, would
require Colton to look for ways to speed up the staining operation, by simplifying it, by training
the operator, or other means. In the fourth TOC step, Colton could consider adding a part time
employee to add capacity at the constraint, though it might be difficult to find a skilled employee
who wanted part time work. Adding a full time employee would be unnecessary and wasteful,
unless the motel contract works out. In the final TOC step, Colton should consider the
possibility of re-design, by for example using a different type of stain that requires less time and
skill. Also, Colton should consider maintaining a small amount of product inventory so that the
unmet demand of product, at times (as for tables in this case) can be sold from inventory.
 Required

Prepare a short set of notes that Don can use in the executive meeting if questions come up about the
problems at the Canton plant.

Solution (30 min)

With the information available Don can complete the first two steps of TOC as shown below.
The analysis shows that the reactor process is the constraint, and that in the short run,
Polymer 1 is the most profitable product. The most profitable product mix is 60 units of
Polymer 1 and 35 units Polymer 2. Until the production delays can be dealt with (TOC steps
3-5), Don should advise IPC to meet all the sales demand of Polymer 1 and to advise
customers of Polymer 2 there would be some delays in the short–term. Then, IPC should
work quickly to relieve the constraint, reactor time, by applying the third, fourth and fifth TOC
steps. Without specialized technical knowledge of the manufacturing processes in this
industry, one can only speculate about what these steps might be.

Data
Time Required for each Product Time
Activity Name Polymer 1 Polymer 2 Available
First Filtering 2 4 320
Second Stripper 2 3 320
Third Reactor 3 5 320
Fourth Final Filter 2 1 160
Fifth Mixing 3 3 320

Products Name Demand Price Variable cost

First Polymer 1 60 $145 45
Second Polymer 2 40 $185 60
Problem 13-47 Theory of Constraint for a Restaurant
Taylor’s is a popular restaurant that offers customers a large dining room and comfortable bar area. Taylor Henry, the
owner and manager of the restaurant, has seen the number of patrons increase steadily over the last two years and is
considering whether and when she will have to expand its available capacity. The restaurant occupies a large home,
and all the space in the building is now used for dining, the bar, and kitchen, but there space available to expand the
restaurant. The restaurant is open from 6pm to 10pm each night (except Monday) and has an average of 24
customers in the bar and 50 in the dining room during each of those hours. Taylor has noticed the trends over the last
two years and expects that within a year or two the number of bar customers will increase by 50% and the dining
customers will increase by 20%. Taylor is worried that the restaurant will be not be able to handle the increase, and
has asked you to study its capacity. In your study you consider four areas of capacity: the parking lot (which has 55
spaces, the bar (60 seats), the dining room (100 seats), and the kitchen. The kitchen is well staffed and can prepare
any meal on the menu in an average of 12 minutes per meal. The kitchen when fully staffed is able to have up to 20
meals in preparation at a time, or 100 meals per hour (60min/12min x 20 meals). To assess the capacity of the
restaurant, you obtain the additional information:
Diners typically come to the restaurant by car and on the average 3 persons to a car, while bar patrons arrive on the
average 1.5 persons per car
Diners on the average occupy a table for an hour and a half, while bar customers usually stay for an average of two
hours
Due to fire regulations, all bar customers must be seated.
The bar customer typically orders two drinks at an average of $7 per drink; the dining room customer orders a meal
with an average price of $22; the restaurant’s cost per drink is $1, and the direct costs for meal preparation is $5

Required (note: when calculating capacity usage, you may round numbers up to the nearest whole digit)
(a) Given the current number of customers per hour, what is the amount of excess capacity in the bar, dining room,
parking lot, and kitchen?
(b) Calculate the expected total throughput margin for the restaurant per hour, day, and month (assuming a 26 day
month).
(a) Given the expected increase in the number of customers, determine if there is a constraint for any of the four areas
of capacity. What is the amount of needed capacity for each constraint?
(b) If there is a constraint, reduce the demand on the constraint so that the restaurant is at full capacity (assume
some customers would have to be turned away). Calculate the expected total throughput margin for the
restaurant per hour, day and month (assuming a 26 day month).

Taylor has obtained construction estimates, and to increase the capacity of her bar to 80 seats and dining room to 120
seats and kitchen to 25 meals at the same time would cost $250,000 which she could finance for $5,000 per month for
the next five years. Given your analysis above, prepare a brief recommendation to Taylor regarding expanding the
restaurant.

Solution (80 min)

Average Customer
Part 1 Average Number of Time in
Data Number of Customers Restaurant
Customers/hr Price Materials Cost per car (hours)
Bar 24 $ 7.00 $ 1.00 1.5 2
Dining 50 $ 22.00 $ 5.00 3 1
- -
Time for preperation of each meal 12min.
Number of meals that can be prepared at one time 20meals
-
Capacity Required Available
Activity Bar Dining Capacity
Parking (spaces) 32.00 16.67 80 parking spaces
Bar (seats) 48.00 0.00 54 seats
Dining (seats) 0.00 50.00 100 seats
Kitchen (meals) 0.00 50.00 100 meals/hr
* Assumes the maximum capacity require in any hour is the case scenario in which all 24 bar customers arrive at the start of the hour and stay for 2 hours; those arriving at 9pm
(an hour before closing) will only stay for one hour(and have 2 drinks during this hour); this means parking receives 24/1.5 = 16 cars per hour; the patron stays 2 hours, so 16x2=32
parking spaces are required from 7pm-10pm. From 6pm-7pm, only 16 parking spaces are required, for the first 24 patrons arriving at 6pm. The same analysis applies for the number
of bar seats required at maximum capacity; there will be 24x2 hrs = 48 seats required from 7pm-10pm, but 24 seats required from 6pm to 7pm. ** Since diners arrive at the start of
the hour and use the dining space for one hour, the number of dining seats required per hour equals the number of diners.

Step One: Identify the Constraint

Total Time Required for Each activity for Given Demand
Total Capacity Capacity
Bar Dining Usage Available Slack
Parking (spaces) 32.00 17.00 49.00 80 31.0
Bar (seats) 48.00 - 48.00 54 6.0
Dining (seats) - 50.00 50.00 100 50.0
Kitchen (meals) - 50.00 50.00 100 50.0

Bar/hr Dining/hr
Demand 24 50
Price $ 7.00 $ 22.00
Materials Cost $ 1.00 $ 5.00
Throughput Margin/hour $ 6.00 $ 17.00

Total Throughput Restaurant Total

Restaurant total per hour $ 144.00 $ 850.00 $ 994.00
Restaurant total per day $ 576.00 $ 3,400.00 $ 3,976.00
Restaurant total per month $ 14,976.00 $ 88,400.00 $ 103,376.00

At the current level of demand, there is sufficient capacity in each of the four activities; see column headed “Slack”
above.
The total throughput margin is $994 per hour, $3,976 per day, and $103,376 per month, which does not include
labor or facilities costs. The dining room generates five times the throughput of the bar ($88,400 compared to
$14,976).

2a. First: calculate the required capacity usage for the expected demand; the bar demand will increase 50% to
36 and the dining demand will increase 20% to 60.

Part 2 Average Customer

Average Number of Time in
Data Number of Customers Restaurant
Product Customers/hr Price Materials Cost per car (hours)
Bar 36 $ 7.00 $ 1.00 1.5 2
Dining 60 $ 22.00 $ 5.00 3 1
- -
Time for preperation of each meal 12min.
Number of meals that can be prepared at one time 20meals
-
Capacity Required/hr Available
Activity Bar Dining Capacity/hr
Parking (spaces) 48.00 20.00 80 parking spaces
Bar (seats) 72.00 0.00 54 seats
Dining (seats) 0.00 60.00 100 seats
Kitchen (meals) 0.00 60.00 100 meals/hr

Step One: Identify the Constraint

Total Time Required for Each activity for Given Demand
Total Capacity Capacity Slack
Bar Dining Usage Available Time
Parking (spaces) 48.00 20.00 68.00 80 12.0
Bar (seats) 72.00 - 72.00 54 (18.0)
Dining (seats) - 60.00 60.00 100 40.0
Kitchen (meals) - 60.00 60.00 100 40.0

There is insufficient capacity in the bar; 72 seats are required, 18 more than capacity. The next step is to find the
number of bar customers that the restaurant could serve at full capacity.

2b. The number of customers the bar could serve at full capacity is 27 customers from 7pm to 10pm; 27 customers at 2
hours per customer means 54 seats, the maximum available. From 6pm-7pm, 36 customers can be served There is
excess capacity in the parking lot, so no problem there.

Average Customer
Average Number of Time in
Data Number of Customers Restaurant
Product Customers/hr Price Materials Cost per car (hours)
Bar 27 $7.00 $1.00 1.5 2
Dining 60 $22.00 $5.00 3 1

Time for preperation of each meal 12min.

Number of meals that can be prepared at one time 20meals

Capacity Required/hr Available

Activity Bar Dining Capacity/hr
Parking (spaces) 36.00 20.00 80 parking spaces
Bar (seats) 54.00 0.00 54 seats
Dining (seats) 0.00 60.00 100 seats
Kitchen (meals) 0.00 60.00 100 meals/hr

Step One: Identify the Constraint

Total Time Required for Each activity for Given Demand
Total Capacity Capacity Slack
Bar Dining Usage Available Time
Parking (spaces) 36.00 20.00 56.00 80 24.0
Bar (seats) 54.00 - 54.00 54 -
Dining (seats) - 60.00 60.00 100 40.0
Kitchen (meals) - 60.00 60.00 100 40.0

Bar Dining
Demand 27 60
Price $ 7.00 $ 22.00
Materials Cost $ 1.00 $ 5.00
Throughput Margin $ 6.00 $ 17.00

Total Throughput Restaurant Total

Restaurant average per hour $ 1,020.00
First hour: 36 patrons, one drink/hr $ 216.00 $ -
2d-4th hours: 27 patrons, one drink/hr $ 162.00 $ - *
Total for 4 hours $ 702.00 $ 1,020.00 $ 1,722.00
Restaurant average per day (4hrs) $ 702.00 $ 4,080.00 $ 4,782.00
Restaurant average per month (26 days) $ 18,252.00 $ 106,080.00 ###
*With 27 new customers arriving at 7pm, this assumes that 9 (=36-27) of the 6pm customers must leave at 7pm

The restaurant’s total monthly throughput is $124,332, a substantial increase of $20,956 over the current total throughput of $103,376.

Part 3 Average Customer

Average Number of Time in
Data Number of Customers Restaurant
Product Customers/hr Price Materials Cost per car (hours)
Bar 36 $ 7.00 $ 1.00 1.5 2
Dining 60 $ 22.00 $ 5.00 3 1

Time for preperation of each meal 12min.

Number of meals that can be prepared at one time 25meals

Capacity Required/hr Available

Activity Bar Dining Capacity/hr
Parking (spaces) 48.00 20.00 80 parking spaces
Bar (seats) 72.00 0.00 80 seats
Dining (seats) 0.00 60.00 120 seats

Kitchen (meals) 0.00 60.00 125 meals/hr

Step One: Identify the Constraint

Total Time Required for Each activity for Given Demand
Total Capacity Capacity Slack
Bar Dining Usage Available Time
Parking (spaces) 48.00 20.00 68.00 80 12.0
Bar (seats) 72.00 - 72.00 80 8.0
Dining (seats) - 60.00 60.00 120 60.0
Kitchen (meals) - 60.00 60.00 125 65.0

Bar Dining Total

Demand 36 60
Price $ 7.00 $ 22.00
Materials Cost $ 1.00 $ 5.00
Throughput Margin $ 6.00 $ 17.00
Total Throughput
Restaurant total per hour $ 216.00 $ 1,020.00 $ 1,236.00
Restaurant total per day $ 864.00 $ 4,080.00 $ 4,944.00
Restaurant total per month $ 22,464.00 $ 106,080.00 $ 128,544.00

Contribution prior to expansion $ 124,332.00

Increase in monthly contribution $ 4,212.00

The increase of $4,212 in total monthly throughput is less than the $5,000 expected monthly cost of the
construction needed to increase the capacity of the restaurant. Moreover, the expansion of the dining
facility was unnecessary, because there was no constraint there. So unless dining is expected to increase
by more than 10% over the next four years, the expansion plan is not needed. Taylor can accommodate the
growth within the current capacity of the restaurant.

This suggests that Taylor should consider delaying consideration of the expansion and perhaps turn some
bar customers away if necessary. Also, the above analysis does not consider the increased cost of labor
and facilities/operating costs that would be involved in the expansion; an expanded facility is likely to
increase these additional costs.

In recessionary times, restaurants also get help from their suppliers, that provide hints for the design of
menus, marketing and administrative services, and suggestions for new recipes. The extra help can make
the restaurant more competitive, and of course, provides a continuing customer for the supplier.

See: Christopher Palmeri, “SYSCO Hustles to Keep Restaurants Cooking,” Business Week, may 18, 2009,
pp 52-3/
Required
Explain why Tim may be wrong in his assessment of the relative performances of the two products.
Suppose that 80 percent of the R&D and selling expenses are traceable to Xderm. Prepare life-cycle income
statements for each product and calculate the return on sales. What does this tell you about the importance of
accurate life-cycle costing?
Consider again your answers in requirements 1 and 2, and the the following additional information. R&D and
selling expenses are substantially higher for Xderm because it is a new product. Tim has strongly supported
development of the new product, including the high selling and R&D expenses. He has assured senior managers
that the Xderm investment will pay off in improved profits for the company. What are the ethical issues, if any,
facing Tim as he reports to top management on the profitability of the company's two products?

Solution (25 min)

1. Waters’ analysis based on the prepared report fails to consider the very significant amount of research
and development and selling costs. It is unlikely that the two products consumed equal shares of these
costs. As the calculations in part 2 below illustrate, the determination of profitability can be significantly
affected by the tracing of these non-manufacturing costs each product. The idea is that life-cycle costing,
including upstream and downstream costs (research and development, and selling costs, respectively) as
well as the manufacturing costs, is necessary to get an accurate picture of each products overall
profitability.

Xderm Yderm Total

Sales $3,000,000 $2,000,000 $5,000,000
Cost of goods sold $1,900,000 $1,600,000 $3,500,000
Gross profit $1,100,000 $400,000 $1,500,000
Research and development $720,000 $180,000 $900,000
Selling expenses $80,000 $20,000 $100,000
Profit before taxes $300,000 $200,000 $500,000

The life-cycle product line profitability analysis shows a much different result.

2.Now, the two products have the same pre-tax profit margin of 10%. This illustrates that including
the upstream and downstream costs can be very important in getting a useful analysis of product
profitability. Failing to include these non-manufacturing costs, as Waters did at first, may lead to
incorrect marketing and management decision making, as the firm may have a biased and
incorrect idea of the most profitable product(s).
Problem 13-49 Life-cycle costing, Health care, Present Value
Background
Cure-all, Inc., has developed a drug that will diminish the effects of aging. Cure
on research and development and $2,108,000 for clinical trials. Once the drug
which is imminent, it will have a five-year sales life cycle. Laura Russell, Cure-a
must determine the best alternative for the company among three options. Th
toCure-all manufacture, package, and distribute the drug; outsource only the ma
drug’s patent. Laura has compiled the following annual cost information for thi
were to manufacture it:

Cost Category
Fixed Costs Variable Cost per unit

Manufacturing $5,000,000 $ 68.00

Packaging $380,000 $ 20.00
Distribution $1,125,000 $ 6.50
Advertising $2,280,000 $ 12.00

Management anticipates a high demand for the drug and has benchmarked $235 p
price based on other drugs that promise similar results. Management expects sales
units over five years; it uses a discount rate of 10 percent.

If Cure-All chooses to outsource the manufacturing of the drug while continuing to p

and advertise it, the manufacturing costs would result in fixed costs of $ 1,350,00 an
$74 per unit. For the sale of the patent, Cure-all would receive $300,000,000 now a
$25,000,000 at the end of the year for the next five years.

Data (from above) for analysis (below):

Selling price per unit = $235.00
Decision horizon (life, in years) = 5
Discount rate (for present value analysis) 10.00%
Annual volume (units) = 3,000,000
Manufacturing costs, if outsoure option chosen:
Fixed costs per year = $1,350,000
Variable costs, per unit = $74.00
 Sale of patent rights:
Immediate receipt of cash = $300,000,000
Each year, for five coming years = $25,000,000
Sunk costs:
R&D = $1,000,000
Clinical trials = $2,108,000

Required:
Determine the best option for Cure-All. Support your answer.

Solution

Life-Cycle Costs
IF CURE ALL MANUFACTURES
Revenues $705,000,000
Costs:
R&D $1,000,000
Clinical trials $2,108,000
Manufacturing
fixed $25,000,000
variable $204,000,000
Packaging
fixed $1,900,000
variable $60,000,000
Distribution
fixed $5,625,000
variable $19,500,000
Advertising
fixed $11,400,000
variable $36,000,000
Total Cost $366,533,000
Operating Income $338,467,000

Thus, outsourcing the manufacturing results in a marginally higher life-time operatin

Management would have to decide if the extra $250,000 of profit worth the risks ass
3.
It appears that selling the drug patent is the best alternative since receiving $425,000,00
x 5)) over the five-year period is greater than the operating incomes of both the other opt
determine the real value of any of these alternatives, one should consider the present va
manufacturing and outsourcing stream would be identical timing of the cash flows, and s
factor you choose, outsourcing would have the higher net present value. To determine th
patent, perform a calculation for the present value of the annuity, the $25,000,000 at the
years. Assume a discount rate of 10%, and the present value of the five-year annuity (an
$25,000,000 x 3.791 = $94,7775,00. Thus the total value of the sale of the patent is $94
$394,775,000. (details of calculation are before). The value is higher than the next best
before a present value computation, so, from a strictly financial point of view, the best alt

assumed discount rate = 10.00%

Year PV factor, year no.
1 0.9091
2 0.8264
3 0.7513
4 0.6830
5 0.6209
PV annuity factor 3.7907

PV of patent sale:
Immediate cash receipt =
PV of five-year stream of payments =
 ue

effects of aging. Cure-all has spent $1,000,000

trials. Once the drug is approved by the FDA,
Laura Russell, Cure-all’s chief financial officer,
ong three options. The company can choose
outsource only the manufacturing; or sell the
ost information for this drug if the company

Cost per unit

as benchmarked $235 per unit as a reasonable

nagement expects sales volume of 3,000,000

rug while continuing to package, distribute,

ed costs of $ 1,350,00 and variable costs of
eive $300,000,000 now and
e-Cycle Costs
IF CURE ALL OUTSOURCES
$705,000,000

$1,000,000
$2,108,000

$6,750,000
$222,000,000

$1,900,000
$60,000,000

$5,625,000
$19,500,000

$11,400,000
$36,000,000
$366,283,000
$338,717,000 $250,000

higher life-time operating income than manufacturing the drug.

profit worth the risks associated with outsourcing.
 e receiving $425,000,000 ( ($300,000,000 + ($25,000,000
mes of both the other options. However, in order to
consider the present value of the income streams. The
of the cash flows, and so no matter which present value
nt value. To determine the present value of selling the
, the $25,000,000 at the end of every year for the next 5
the five-year annuity (an annuity factor of 3.791 at 10%) is
sale of the patent is $94,775,000 + $300,000,000 =
gher than the next best alternative (outsourcing) even
point of view, the best alternative is selling the patent.

$300,000,000
$94,767,500 (Rounding error)
$394,767,500
Problem 13-50 Constraint Analysis, Flow Diagrams
Background

Silver Aviation assembles small aircraft for commercial use. The majority of its business i
areas whose airports do not accommodate larger planes. The remainder of Silver's custo
individuals who use plnes in their businesses, such as the ownders of larger ranches. Si
into Central and South America, and the company expects to double its sales over the n

To schedule work and track all projects, Silver uses a flow diagram. The diagram for the a
shown in Exhibit 1. The diagram shows four alternative paths with the critical path being A
of Coastal Airlines, recently placed an order with Silver Aviation for five cargo planes. Dur
agreed to a delivery time of 13 weeks (five work days per week) for the first plane, with th
delivered at the rate of one every four weeks. Because of problems with some of the airc
Bob contacted Grace Vander, sales manager for Silver Aviation, to ask about improving t
plane. Grace replied that she believed the schedule could be shortened by as much as 1
cost of assembly would increase as a result. Bob said he would be willing to consider the
to meet the following day to review a revised schedule that Grace would prepare.

Because Silver Aviation previously assembled aircraft on an accelerated basis, the comp
this purpose. Grace used the data shown in Exhibit 2 to develop a plan to cut 10 working
minimum increase in cost to Coastal Airlines. Upon completing her plan, she reported to
10 working days from the schedule for an associated increase in cost of $6,000. Grace's
assembly schedule for the cargo plane starting from the regularly scheduled days and co
Exhibit 2
Expected
Acitivity Times
Activity Regular Crash
AB Fame fusalage 20 16
BC Wing placement 6 5
CD Engine mount 9 7
DE Landing gear 7 5
BE Cargo doors 3 3
BG Electical wiring 15 13
GE Instrument panel 8 6
EF Electrical tests 11 10
GH Exterior shell 9 7
FI Interior finish 8 7
HI Exterior paint 6 5
IJ Final testing 3 2

Exhibit 3
Accelerated Plane Assembly
Total
Activity Crashed Add'l Cost/Day Direct Cost
$65,100
HI by one day $400 $65,500
FI by one day $400 $65,900
GH by two days $500 $66,900
CD by two days $700 $68,300
EF by one day $800 $69,100
DE by two days $800 $70,700
BG by one day $1,000 $71,700

Required:
1. Explain why Grace's plan is unsatisfactory.

2. Revise the accelerated assembly schedule so that Coastal Airlines will take delivery of
schedule at the least incremental cost to Coastal.

3. Calculate the incremental costs that Bob will have to pay for this revised accelerated de

4. How might Silver Aviation use the information in Exhibits 1 and 2 to their competitive ad
 2. Revise the accelerated assembly schedule so that Coastal Airlines will take delivery of
schedule at the least incremental cost to Coastal.

3. Calculate the incremental costs that Bob will have to pay for this revised accelerated de

4. How might Silver Aviation use the information in Exhibits 1 and 2 to their competitive ad

Solution
1.
Grace Vander’s accelerated delivery schedule is unsatisfactory in cutting 10 days from
crashed activities are included on the critical path. The critical path is ABGEFIJ, 65 days

In order to reduce the completion time for a project, activities along the critical path
Vander’s selection of activities FI, EF, and BG, which are on the critical path ABGEFIJ
three days but her selection of activities HI, GH, CD, and DE have no impact on the critic

2.
Below is a revised accelerated delivery schedule that meets both objectives: (1) delive
ahead of schedule, and (2) at least incremental cost to Coastal. All the paths need to b
time. However, the selection of activities to crash should be taken from the critical path
order according to the smallest crash cost. The critical path now becomes ABCDEFIJ an
project completion date by eight days. Therefore, the activity CD (the next least costly
which will then bring all paths to 55 days or less.

Incremental Cost
Activity Crashed Days Reduced per day Incremental Cost

START

FI 1 $400 $400

EF 1 800 800
IJ 1 900 900
BG 2 1,000 2,000
AB 4 1,200 4,800
GE 1 1,300 1,300
CD 2 700 1,400
Total $11,600
3.
The total incremental costs Bob Peterson will have to pay for this revised accelerated
cost of $76,700 from the original $65,100, and a saving of 10 days.

4.
The fact that Silver line’s management can open negotiations with a customer regard
there is a potential to differentiate Silver Line on the basis of delivery schedules. Rat
potential to speed up delivery, as is the situation with Coastal, perhaps the sales team
to customers. It could be a premium price for a faster delivery, like the deal with Coa
delivery timeframe is possible. These longer delivery time frames would make room
The majority of its business is with small freight airlines serving
e remainder of Silver's customers are commuter airlines and
wnders of larger ranches. Silver recently expanded its market
double its sales over the next three years.

agram. The diagram for the assembly of a single cargo plane is

with the critical path being ABDEFJK. Bob Peterson, president
on for five cargo planes. During contract negotiations, Bob
ek) for the first plane, with the balance of the planes being
blems with some of the aircraft that Coastal is currently using,
on, to ask about improving the delivery date of the first cargo
shortened by as much as 10 work days or two weeks, but the
uld be willing to consider the increased costs, and they agreed
Grace would prepare.

accelerated basis, the company has a list of "crash costs" for

lop a plan to cut 10 working days from the schedule at a
ng her plan, she reported to Bob that Silver would be able to cut
e in cost of $6,000. Grace's Exhibit 3 shows accelerated
larly scheduled days and cost.
 Direct Cost Added Crash Cost
Regular Crash Per Reduced Day
$12,000 $16,800 $1,200
$3,600 $5,000 $1,400
$6,600 $8,000 $700
$5,100 $6,700 $800
$1,400 $1,400 $0
$9,000 $11,000 $1,000
$5,700 $8,300 $1,300
$6,800 $7,600 $800
$4,200 $5,200 $500
$3,600 $4,000 $400
$3,600 $4,000 $400
$3,500 $4,400 $900
$65,100 $82,400

No. of
Days

1
1
2
2
1
2
1

Airlines will take delivery of the first plane ahead of

r this revised accelerated delivery.

and 2 to their competitive advantage?

Airlines will take delivery of the first plane ahead of

r this revised accelerated delivery.

and 2 to their competitive advantage?

tory in cutting 10 days from the total project schedule because not all of her
al path is ABGEFIJ, 65 days, the longest path through the diagram.

ities along the critical path need to be chosen to be crashed or reduced.

n the critical path ABGEFIJ, will reduce total project completion time only by
have no impact on the critical path and thus will not reduce project time.

s both objectives: (1) delivery of the first plane two week (10 working days)
stal. All the paths need to be evaluated when reducing a project’s completion
e taken from the critical path first and then the activities should be selected in
now becomes ABCDEFIJ and will take 57 days, having only reduced the total
ty CD (the next least costly available activity) needs to be crashed two days

ABGEFJ ABGHIJ ABEFIJ ABCDEFIJ

65 53 45 64

64 53 44 63

63 53 43 62
62 52 42 61
60 50 42 61
56 46 38 57
55 45 38 57
55 45 38 55
y for this revised accelerated delivery schedule amount to $11,600, or a new total project
of 10 days.

ions with a customer regarding the tradeoff between price and timing of delivery indicates
s of delivery schedules. Rather than wait until a customer approaches them about the
astal, perhaps the sales team could be more proactive in offering this time and cost tradeoff
livery, like the deal with Coastal, but they might also be able to offer lower prices if a longer
e frames would make room for the “rush” orders that could be sold at a premium.
w total project

livery indicates
m about the
and cost tradeoff
prices if a longer
mium.
Problem 13-51 Research Problem

Research Assignment, Sustainability and the Supply Chain Obtain from your libra
copy of the following article: Hau L. Lee, “Don't Tweak Your Supply Chain--Rethink It E
End,” Harvard Business Review, October 2010, pp. 62-69. The article

Required After reading the above-referenced article, answer the following questions:
1. Why are organizations asking supply chain partners about their environmental and
social performance?
2. Generally speaking, who are the stakeholders that have an interest in improved
environmental and social responsibility? In developing your response, think in terms o
extended supply chain.
3. Define the term structural change. According to the authors of this article, why shou
companies undertake broader structural changes than most currently do?
4. What role can management accountants play when improved environmental and soc
responsibility becomes a goal of an organization?

Solution (40 min)

1.
Organizations are facing mounting pressures to show that they are operating in a s
and environmentally sustainable manner. Since few organizations operate
completely self-contained manner that spans the entire supply chain, they
consider the social and environmental impact of their supply chain partner. In short
the response to a competitive pressure and pressure from stakeholders.

2.
The stakeholders include customers, shareholders, boards, employees, governm
and non-governmental organizations. In addition, the communities in which
organization and its supply chain partners operate are stakeholders.

3.
A structural change is more comprehensive than a simple change, like using
energy efficient vehicles. Rather, structural changes occur at a much grander sc
The article notes that Is may include innovations in production processes or develo
fundamentally different relationships with business partners, and may even encom
collaborations with competitors.
3.
A structural change is more comprehensive than a simple change, like using
energy efficient vehicles. Rather, structural changes occur at a much grander sc
The article notes that Is may include innovations in production processes or develo
fundamentally different relationships with business partners, and may even encom
collaborations with competitors.

Companies need to be more proactive rather than reactive and undertake struc
changes early in the development of their supply chain relationships in order to
broaden the impact of such changes. An important reason relates to the comme
page 64 of the article that stated “ A well-intentioned individual action or demand a
at making a business greener can create a long string of unanticip
consequences…” Being proactive and developing integrated structural changes i
early stages of supply chain development can help integrate and potentially broade
impact of the efforts and help avoid or minimize these unintended consequences.
4.
The management accountant can play a role in both the measurement and monitor
of environmental impact and in the evaluation of any capital expenditure proposals
related to potential structural changes.

If an organization and its supply chain partners are going to hold themselves out as
having a strong commitment to sustainability, they must be prepared to support thos
claims with measures of performance. The management accountant can help ident
potential metrics and support the data collection and reporting effort. The accounta
could also perform analysis of variances that compare expected environmental and
other non-financial benefits and costs. Another role would be to prepare some type
“lifecycle” analysis that compares expected and actual cumulative sustainability rela
costs and benefits.

If there is a potential need for capital investment to implement structural changes, th

management accountant can compare the costs and benefits of such proposals. Th
could include a traditional capital budgeting analysis and post-investment audits.

The information relates to and was adapted from Hau L. Lee, “Don't Tweak Your Su
Chain--Rethink It End to End,” Harvard Business Review, October 2010, pp. 62-69
ain from your library a
hain--Rethink It End to
le

owing questions:
nvironmental and

t in improved
e, think in terms of the

s article, why should

do?
ronmental and social

e operating in a social
zations operate in a
ply chain, they must
n partner. In short, it is
olders.

ployees, governments,
munities in which the
rs.

ange, like using more

much grander scale.
ocesses or developing
may even encompass
ange, like using more
much grander scale.
ocesses or developing
may even encompass

d undertake structural
ships in order to help
es to the comment on
ction or demand aimed
ng of unanticipated
uctural changes in the
potentially broaden the
consequences.

ment and monitoring

nditure proposals

hemselves out as
ed to support those
ant can help identify
ort. The accountant
nvironmental and
epare some type of
sustainability related

uctural changes, the

uch proposals. This
estment audits.

n't Tweak Your Supply

r 2010, pp. 62-69