Chap 013

Chapter 13 - Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic
Pricing
CHAPTER 13
COST PLANNING FOR THE PRODUCT LIFE CYCLE: TARGET
COSTING, THEORY OF CONSTRAINTS,
AND STRATEGIC PRICING
QUESTIONS
13-1 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 advanced cost management techniques such as activity-based
costing, and seeking higher productivity through improved organization and
labor relations. This method of cost reduction is common in specialized
equipment manufacturing.
b. Reduce cost to a target cost level by redesigning a popular product. This
method is the more common of the two, because it recognizes that design
decisions account for much of total product life cycle costs (see Exhibit 13-3). By
careful attention to design, significant reductions in total cost are possible. This
approach to target costing is associated primarily with Japanese manufacturers,
especially Toyota, which is credited with developing the method in the mid
1960s. This method of cost reduction is common in consumer electronics.
13-2 The sales life cycle refers to the phase of the products sales in the market - from
introduction of the product to decline and withdrawal from the market. In
contrast, the cost life cycle refers to the activities and costs incurred in
developing a product, designing it, manufacturing it, selling it and servicing it.
The phases of the sales life cycle are:
Phase One: Product Introduction. In the first phase there is little
competition, and sales rise slowly as customers become aware of the new
product. Costs are relatively high because of high R&D expenditures and capital
costs for setting up production facilities and marketing efforts. Prices are
relatively high because of product differentiation and the high costs at this
phase. Product variety is limited.
Phase Two: Growth. Sales begin to grow rapidly and product variety
increases. The product continues to enjoy 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 a reduction in the number of competitors and product variety. Prices
soften further, and differentiation is no longer important. Competition is based
on cost, given competitive quality and functionality.
Phase Four: Decline. Sales begin to decline, as does the number of
competitors. Prices stabilize. Emphasis on differentiation returns. Survivors are
able to differentiate their product, control costs, and deliver quality and excellent
service. Control of costs and an effective distribution network are key to
continued survival.
13-1
Pricing
13-3 The strategic pricing approach changes over the sales life cycle of the product.
In the first phase, pricing is set relatively high to recover development costs and
to take advantage of product differentiation and the new demand for the product.
In the second phase, pricing is likely to stay relatively high as the firm attempts
to build profitability in the growing market. Alternatively, to maintain or increase
market share at this time, relatively low prices (penetration pricing) might be
used. In the latter phases, pricing becomes more competitive, and target costing
and life-cycle costing methods are used, as the firm becomes more of a price
taker rather than a price setter.
13-4 At the introduction and into the growth phases, the primary need is for value
chain analysis, to guide the design of products in a cost-efficient manner. Master
budgets (Chapter 10) are also used in these early phases to manage cash flows;
there are large developmental costs at a time when sales revenues are still
relatively small. Then, as the strategy shifts to cost leadership in the latter
phases, the goal of the cost management system is to provide the detailed
budgets and activity-based costing tools for accurate cost information.
13-5 Target costing is a method by which the firm determines the desired cost for the
product, given a competitive market price, so that the firm can earn a desired
profit. It is used by several manufacturing firms, particularly in the automotive
and consumer products industries, such as Honda, Toyota, Ford, Volkswagen,
and Olympus camera.
13-6 Life-cycle costing considers the entire cost life cycle of the product, and thus
provides a more complete perspective of product costs and product profitability.
It is used to manage the total costs of the product across its entire life cycle. For
example, design and development costs may be increased in order to decrease
manufacturing costs and service costs later in the life cycle.
13-7 There are five steps in TOC analysis:
Step One: Identify the Constraint

Use a flow diagram. The constraint is a resource that limits production to less
than market demand.
Step Two: Determine the Most Efficient Utilization of Each Constraint

Product mix decision: based on capacity available at the constraint, find the most
profitable product mix.
Maximize flow through the constraint:
-reduce setups
-reduce lot sizes
-focus on throughput rather than efficiency
Step Three: Maximize the Flow Through the Constraint
13-2
Pricing
The objective of step three is to see that all resources are coordinated to keep
the constraint busy without a build-up of work-in-process inventory.
Step Four: Increase Capacity on the Constrained Resource

Invest in additional capacity if it will increase throughput greater than the cost of
the investment. Do not move to investment until steps two and three are
complete, that is, maximize the 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 considered to be the most important because the analysis
undertaken is intended to improve the speed of product flow through the
constraint.
13-8 TOC emphasizes the improvement of throughput by removing or reducing the

constraints, which are bottlenecks in the production process that slow the rate of
output. These are often identified as processes wherein relatively large amounts
of inventory are accumulating, or where there appear to be large lead times.
Using TOC the management accountant speeds the flow of product through the
constraint, and chooses the mix of product so as to maximize the profitability of
the product flow through the constraint.
13-9 The purpose of the flow diagram is to assist the management accountant in the
first step of TOC, that is, to identify the constraints.
13-10 Product design is important in life cycle costing because the design of the
product locks in most of the downstream costs manufacturing, distribution and
service. A well-designed product will be easy and inexpensive to manufacture,
will have few quality defects which make it easy to sell and service, thereby
reducing downstream costs. A common rule of thumb is that design locks in
approximately 80% of total life cycle costs.
13-11 Value engineering is used in target costing to reduce product cost by analyzing
the tradeoffs between different types and levels of product functionality and total
product cost. Two common forms of value engineering are:
Design analysis is a process where the design team prepares several possible
designs of the product, each having similar features but different levels of
performance on these features and different costs.
13-3
Pricing
Functional analysis is a process where each major function or feature of the

product is examined in terms of its performance and cost. Group technology is a
method of identifying similarities in the parts of products a firm manufactures so
the same part can be used in two or more products, thereby reducing costs.
Concurrent engineering,or simultaneous engineering, is an important new
method that integrates product design with manufacturing and marketing
throughout the products life cycle. Value engineering is important in target
costing because it identifies the options for product design that can then be
evaluated in terms of desirability to the customer and manufacturing cost, as a
means for coming up with the best design that satisfies customer needs at the
desired target cost.
13-12 Activity-based costing (ABC) is used to assess the profitability of products, just
as is TOC. The difference is that TOC takes a short-term approach to
profitability analysis, while ABC develops a longer-term analysis. The TOC
analysis has a short-term focus because of its emphasis on materials related
costs only, while ABC includes all product costs. On the other hand, unlike TOC,
ABC does not explicitly include the resource constraints and capacities of
production operations. Thus, ABC cannot be used to determine the short-term
best product mix. ABC and TOC are thus complementary methods; ABC
provides a comprehensive analysis of cost drivers and accurate unit costs as a
basis for strategic decisions about long-term pricing and product mix. In
contrast, TOC provides a useful method for improving the short-term profitability
of the manufacturing plant through short-term product mix adjustments and
through attention to production bottlenecks.
13-13 TOC is appropriate for many types of manufacturing, service and not-for-profit
firms. It is most useful where the product or service is prepared or provided in a
sequence of inter-related activities as can be described in a network diagram
such as shown in Exhibit 13-7. The most common users of TOC to date have
been manufacturing firms that use it to identify machines or steps in the
production process which are bottlenecks in the flow of product and profitability.
13-14 Target costing is most appropriate for firms that are in a very competitive
industry, so that the firms in the industry compete simultaneously on price,
quality and product functionality. In very competitive markets such as this, target
costing is used to determine the desired level of functionality the firm can offer
for the product while maintaining high quality and meeting the competitive price.
13-15 Life-cycle costing is most appropriate for firms that have high upstream costs
(i.e. design and development) and/or high downstream costs (i.e. distribution
and service costs). Firms with high upstream and downstream costs need to
manage the entire life cycle of costs, including the upstream and downstream
costs as well as manufacturing costs. Traditional cost management methods
tend to focus on manufacturing costs only, and for these firms, this approach
would ignore a significant portion of the total costs.
13-4
Pricing
13-16 Strategic pricing is used to help a firm develop and implement its strategy for
success as its products and services mature in the market place. The focus for
new products is typically differentiation and there is a heavy focus on research
and development, while cost control becomes more important as the product
matures. In contrast, life-cycle costing is used to manage the costs of the
product over its entire cost life-cycle - from research and development and
product testing to manufacturing and finally distribution and customer service.
13-17 Takt time is the ratio of available manufacturing time for a period to the units of
customer demand for that period. Each unit must be produced within the Takt
time to satisfy customer demand. Takt time is computed for each manufacturing
operation, and those operations with longer Takt times are the constraints in the
manufacturing process.
13-18 Pricing based on the cost life cycle is a common form of pricing. It involves a
markup on full product cost or product life cycle cost. In contrast, pricing based
on the sales life cycle bases the product price on competitive factors, including
which phase of the sales life cycle (introduction, growth, maturity, or decline) the
product is currently in.
13-5
Pricing
BRIEF EXERCISES
13-19 Current profit per unit = $50 - $ 38 - $8 = $4/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
13-20 Price = 1.4 x ($38) = $53.20
13-21 Price = 1.10 x ($38 + $8) = $50.60
13-22 The introduction phase
13-23 Takt time = 6,000 x 4 weeks per month/200,000 units per month = .12 hour/unit
or 7.2 minutes per unit
13-24 20 days: May 1 to May 20
13-25 2 days in production (May 19 -May 20) = .1

(2 days divided by 20 days cycle time)
13-26 Kaizen, continuous improvement
13-27 $140 ($140 x .25) = $105
13-28 England is using a value chain approach to its operations to simplify, speed up
and reduce costs. The theory of constraints and life cycle costing are also
applicable here. Sources: Dan Morse, Tennessee Producer Tries New Tactic
in Sofas: Speed, The Wall Street Journal, November 19, 2002, p. 1;
13-29 In a Business Week Online News Brief, November 7, 2007, a study is reported
that shows that the customers of the Orlando theme parks seek variety. They
are in Orlando for fun, and variety is part of that. The parks know that most who
come to Orlando will visit two or more of the parks, and they have therefore little
incentive to compete on price. The parks are most likely using a full cost + ROI
techniques since there are large and continual investments in plant and intense
studies of attendance numbers that are dependent on many factors such as fuel
costs for travel, the economy, weather, etc.
13-6
Pricing
EXERCISES
13-30 Target Costing (15 min)

1. The unit cost is currently $548.60 = $13,715,000/25,000
The current profit per item is $610 - $548.60 = $61.40
Thus, the target cost to meet the competitive price is:

$550 - $61.40 = $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 many of the non-value adding costs are
also over budget, with the exception of indirect labor, setups, and
materials handling costs; not only are these costs non-value adding,
they are also increasing above the budget, a strong sign that Kaizen
methods should be employed.
13-7
Pricing
13-31 Strategic Pricing with Rising Commodity Prices (20 min)
Firms such as Kellogg, Sara Lee, Smithfield, and others reacted in a variety
of ways. First, they reduced the length of contracts to wholesalers and
other buyers, so that price adjustments could be make more quickly.
Second, the firms changed the sizing of the packages so that the product
could be sold in smaller quantities for the same price as before.
The strongest brands, the most differentiated firms, such as Kellogg.
Proctor & Gamble and Nestle SA, were better able to pass along the cost
increases in higher prices.
Some would argue that there are ethical issues in the resizing of the
products, on the basis that the effect is to trick the consumer into thinking
they are getting the same product for the same price. Another view is that
the majority of todays shoppers are careful to examine the products
contents (calories, preservatives, fiber,) as well as the package size, so
that the change in packaging would not affect their buying behavior.
See: Scott Kilman, Food Giants Race to Pass Rising Costs to Shoppers,
The Wall Street Journal, August 8, 2008, p1; Ellen Byron and Anjali
Cordeiro, P&G, Others are Confident Higher Prices Will Stick, The Wall
Street Journal, February 20, 2009, p B1; Anjali Cordiero, Higher Prices Help
Fatten Kraft Profit, The Wall Street Journal, May 6, 2009, pB1.
13-8
Pricing
13-32 Manufacturing Cycle Efficiency (10 min)
MCE = total processing time/total cycle time
= 23/(23+3+6+3+1+5+2+6+2) = 23/51 = 45.1%
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.
13-9
Pricing
13-33 Takt Time (10 min)
1. The Takt time for this product is the number of available hours / total
demand.
Total manufacturing time = 70hr x 60 min x 60 sec = 252,000 seconds

8,400 8,400
= 252,000 = 30 seconds per unit

8,400
2. The processing line is not properly balanced. Operation 2 exceeds Takt

time by 4 sec. and Operation 3s time is somewhat 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 2 should be increased so
that it could speed up its operation. Similarly, operation 3 could reduce
capacity and resources to save money; we do not need this operation to
move so fast.
3. 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 accountants 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.
13-10
Pricing
13-34 Life Cycle Costing; Service Departments (20 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 departments 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?
13-11
Pricing
13-35. Target Costing (30 min)
1., 2.
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.
13-12
Pricing
Cost and Activity Usage for Each Product Current Revised

A-10 A-25 A-10 A-25
Direct Materials $ 143.76 $ 66.44 $ 78.65 $ 42.45
Number of parts 121 92 101 81
Machine hours 6 4 5 2
Inspecting time 1 0.6 1 0.5
Packing time 0.7 0.4 0.7 0.2
Set-ups 2 1 1 1
Activity-based Costs
Direct Materials $ 143.76 $ 66.44 $ 78.65 $ 42.45

Materials Handling $ 272.25 $ 207.00 $ 227.25 $ 182.25
Mfg Supervision $ 141.00 $ 94.00 $ 117.50 $ 47.00
Assembly $ 308.55 $ 234.60 $ 257.55 $ 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 $ 771.05 $ 543.35
Price $ 1,050.00 $ 725.00 $ 825.00 $ 595.00

Margin $ 49.74 $ 51.36 $ 53.95 $ 51.65
13-13
Pricing
13-35 (continued -1)

Alternatively, the current activities using parts as a driver are materials
handling and assembly. These costs now total $528.00 ($247.50+
$280.50) which would need to be reduced, by the additional required
margin of $39.25, to $488.75. Therefore, $2.25x + $2.55x = $488.75
and x = 101.82 parts.
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.
13-14
Pricing
13-36 Target Costing in a Service Firm (20 min)

1.
Cancun Jamaica
Package
Specifications Unit Cost Quantity Cost Quantity Cost
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 $200 (Cancun),
from Miami) $355(Jamaica) 1 200 1 355
Transportation to $15 (Cancun),
and from airport $10 (Jamaica) 1 15 1 10
Total $649 $595
Cancun: ($750 - $649 total costs)/$ 750 = 13.47% profit margin

Jamaica: ($690 - $595)/$690 = 13.77% profit margin
2. Cancun ($710 - $649 total costs)/ $710 = 8.59% profit margin

Jamaica: ($650- $595)/$650= 8.46% profit margin
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 lower
its cost in this category.
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.
13-15
Pricing
1. Cost per unit = ($4,500,000 + $1,750,000 + $750,000 + $5,000,000) /

8,000 = $1,500 per unit
Profit per unit = ($3,000 price per unit - $1,500 cost per unit)
= $1,500 per unit
2. Machine setups do not add value to the golf carts.

$750,000 total cost / 8,000 units = $93.75 per unit of non-value added
costs
3. $2,850 price per unit - $1,500 profit per unit = $1,350 per unit target cost
4. Cost must be reduced by $3,000 - $2,850 = $150. First and foremost,

Weekend Golfer should focus on getting back on budget. Inefficiencies in
materials usage have led an extra $37.50/unit in cost ($4,500,000-
$4,200,000)/8,000). Also, getting labor on budget would save an additional
$43.75/unit ($1,750,000/125,000hours = $14 per hour; 25,000 hours excess
X $14 = $350,000; $350,000/8,000 = $43.75 per unit).
Labor and materials costs should be reduced by $43.75 + $37.50 = $81.25.

Additional savings could come from reducing the non-value added costs
from machine setups. This could be done through product design and
manufacturing process reengineering. Also, a careful examination of
mechanical assembly might reveal cost saving opportunities because this
category currently comprises half of the cost per unit. Cutting hours from
mechanical assembly through product innovation or a process change
would provide more savings.
13-16
Pricing
13-38 Pricing (25 min)

The price, contribution, and profit information is as follows.
1. $220.815 = $152.286 X 1.45 / 48,500
2. $229.82 = $183.856 X 1.25 / 48,500
3. $253.81 = $152.286/ (1 - .4)
4. $245.141 = $183.856 / (1 - .25)
5. $252.980 = $183.856 X (1 + .37597)
Where: .37597 = ($22,350,000X.15) / (48,500X$183.86)
6. The contribution margin, gross margin, and operating profit are shown in
the right-hand portion of the table above. For example,
$5,173,878 = $220.815 x 48,500 - $5,535,650
The pricing methods yield prices from $220.82 to $253.81 The next
highest price, $252.98, has the advantage that it provides the desired return
on investment, a more precise statement of the firms goal than in the other
methods. On the other hand, the lower price might be an advantage if the
firm is trying to achieve sales growth and is concerned about maintaining or
improving market share during turns in the business cycle for its customers.
This latter concern is especially important given that the demand for the
firms product is a derived demand, and there is little that Williams can do to
influence total auto sales.
13-17
Pricing
13-39 Life Cycle Pricing (20 min)

Total Fixed Costs $ 2,300
3,000
5,400
6,920
6,000
21,000
$ 44,620
Total variable costs $2.50 + .50 + .50 = $3.50

Life-Cycle Costs =
$ 21,000 for fleet of canoes
446,200 (annual fixed costs x 10 years)
224,000 ($3.50 var. costs x 6,400 rentals per yr x 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
13-18
Pricing
13-40 Sales Life-Cycle Analysis (5 min)
Activities and Market Characteristics Life Cycle Stage

Decline in sales Decline
Advertising Introduction
Boost in production Growth
Stabilized profits Maturity
Competitors entrance into market Growth
Market Research Introduction
Market Saturation Maturity
Start Production Introduction
Product Testing Introduction
Termination of Product Decline
Large Increase in sales Growth
13-19
Pricing
13-41 Pricing Military Contracts (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).
Source: The Right Stuff for the GIs of the Future, Business Week, August
15, 2005, pp 74-75.
13-20
Pricing
13-42 Target Costing Using QFD (20 min)

1. The calculations are shown below:
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. Also,
customer satisfaction does not appear to reward the level of expenditure for
food ingredients; perhaps savings could be made here.
13-21
Pricing
PROBLEMS
13-43Target Costing in a Service Firm (20 min)

1.
ICU 100 ICU 900
Unit Cost Quantity Cost Quantity Cost
Video camera $ 150 1 $150 3 $450
Video monitor 75 1 75 1 75
Motion detector 15 5 75 8 120
Floodlight 8 3 24 7 56
Alarm 15 1 15 2 30
Wiring .10/ft 700 70 1,100 110
Installation 20/hr 16 320 26 520
Total $729 $1,361
Price $810 $1,520

Profit $81 $159
ICU 100: $81/$ 810 = 10% profit margin

ICU 900: $159/$1,520 = 10.46% profit margin
2.
Price $750 $1,390
Profit $21 $29
ICU 100: $21/ $750 = 2.8% profit margin

ICU 900: $29/$1,390 = 2.09% profit margin
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.
13-22
Pricing
13-44 Target Costing, Strategy (15 min)

1. Cost per unit =
($2,700,000 + $1,000,000 + $300,000 + $4,000,000) / 10,000
= $800 per unit
Profit per unit = ($875 price per unit - $800 cost per unit) = $75
2. Machine setups do not add value to the tables.

$300,000 total cost / 10,000 units = $30 per unit of non-value added
costs
3. $800 price per unit - $75 profit per unit = $725 per unit target cost
4. Cost must be reduced by $800 - $725 = $75. First and foremost,

Benchmark should focus on getting back on budget. Inefficiencies in
materials usage have led to an extra $15.88/unit in cost
{ [(25,000/425,000) x $2,700,000]/10,000 = $15.88}.
Also, getting labor on budget would save an additional $15/unit
{ [$1,000,000 x (15,000/100,000)]/10,000 }. This would get costs down
to $769.12 per unit ($800 - $15 - $15.88). Part of the additional $44.12
($75 - $15 - $15.88) of savings needed to attain the $725 target cost
could come from reducing the non-value added costs from machine
setups. This could be done through product design and manufacturing
process reengineering. Also, a careful examination of mechanical
assembly might reveal cost saving opportunities because this category
currently comprises half of the cost per unit. Reducing mechanical
assembly by 2 hours through product innovation or a process
change would provide more than $30 of savings (at
$4,000,000/320,000 = $12.50 per hour; savings of 2 hours per unit
would save 2 x $12.50 = $31.25 per unit)
13-23
Pricing
1. The target cost, at the price of $1,500 and the desired margin of 20%
would be
TC = $1,500 - .2 x $1,500 = $1,200
2.
Currently With Cost Savings
Reductions
Manufacturing $1,000 $835 ($85-$25)+$105=
Cost $165
Marketing Cost 200 200
GSA Cost 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.
13-24
Pricing
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 Morrrows 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?
13-25
Pricing
13-46 Target Costing; Health Care (20 min)

1. The average cost is $256.068 = $262,069,095/1,023,437
The current profit per enrollee is $368 - $256.068 = $111.932
The target cost is $213 = $325 - $111.932 to maintain the same
contribution per enrollee
2. The target cost for 2011 is $228.068 = $340 - $111.932; this calculation
uses the new price and the same profit per enrollee as in 2010. The
required reduction in cost per enrollee is $46.766 as shown in the above
table. Note that the cost per enrollee is determined by taking the average
cost per enrollee for each age group (Col E) in order to determine total
costs (Col F) of $291,074,259. Note that this number differs from the
simple approach of taking 2011 enrollment of 1,059,094 x 2010 cost of
$256.068 x 1.06 = $287,472,087. The reason for the difference is that the
sales mix of enrollees has changed from 2010 to 2011 (see Columns G and
H), and in particular, the two oldest age groups, the most expensive groups,
have increased slightly in number and percentage. Since the coverage rate
of $340 is applicable to all age groups, it is important for VIP-MD to study
the actual pattern of increase in cost, across all age groups as the number
of enrollees in each group change.
13-26
Pricing
A 2006 study shows the cost of health care spending, by age group, as
follows:
Age Group Average 2006

Health Care Costs
Under 5 $1,508
5-17 $1,267
18-24 $1,441
25-44 $2,305
45-64 $4,863
65 and over $8,776
Janet Admay, End-of-Life Provision Loses Favor, The Wall Street Journal,
August 13, 2009, p A4
13-27
Pricing
13-47 Target Cost; Warehousing (20 min)
Current Year Operating Income

Sales $20 x 100,000 = $2,000,000
Costs:
Purchases $10 x 100,000 = $1,000,000
Purchase orders $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
Target Cost
Sales $20.00 x 100,000 x .90 = $1,800,000
Desired profit 320,000
Total cost allowed $1,480,000
Total costs excluding warehousing:
Purchases $1,000,000 x .98 = $980,000
Purchase orders $150 x 700 = 105,000
Distributing $75 x 500 = 37,500
Fixed operating cost $250,000 1,372,500
Maximum warehousing cost $ 107,500
Warehousing costs must be reduced from $240,000 to $107,500, a

reduction of $132,500.
13-28
Pricing
13-48 Target Costing; International (20 min)

1. Target manufacturing cost = Current manufacturing cost + U.S.
Differential
= $56 + Price differential - Cost differential
= $56 + $16 - $10 = $62
Or:
Target cost = target price differential advertising and shipping
desired US profit
$62 = $90 - $10 - $18
2. The cost differential is $62 - $56 = $6

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
firms competitiveness in other markets.
Note: the currency exchange rate used in the problem is based on the
exchange rate of $1.6523/ on June 12, 2009.
13-29
Pricing
13-49 Target Costing; Quality Function Deployment (QFD) (30 min)

1.
13-30
Pricing
2. When the value index is compared to the target cost, the percentage
investment in hull & keel and standing rig looks too low
The value index for hull & keel is 35.5% while the cost index is 30%; the
value index for the standing rig is 20.1% while the cost is only 15%. Ranger
might benefit from additional design enhancement or features related to
these two components.
In contrast, the expenditures for electrical equipment are somewhat higher

than would be indicated by customer preferences. Overall, this suggests
that consideration be given to redesign of the boat to bring it more in line
with customer value.
13-31
Pricing
13-50 Target Costing: Quality Function Deployment
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.
2. A limitation of the above analysis is that there are certain costs of taking
the photos on the day of the wedding (additional lighting, backup
cameras, and equipment, etc) which may make it difficult to reduce the
cost of this activity. The principal take-away from the analysis is to put
careful attention to the planning meeting; when carefully done it can
contribute a great deal to the couples satisfaction with the photos and
therefore ultimately of the quality of the wedding photo book.
13-32
Pricing
13-51 Theory of constraints (25 min)
The analysis below shows that assembly is the constraint and that the
optimal production plan is all 100 units of REC-1 and 44 units of REC-2.
13-33
Pricing
13-52 Theory of Constraints (30 min)
First, summarize key information and obtain hours capacity in each process.
The materials cost for the table is $100 of lumber, while the materials cost
for the sofa equals $250 ($75 for lumber and $175 for fabric).
Second, identify the constraint. In this case the constraint is staining time,
where there is a need for 85 more hours of capacity
Next, determine the most profitable product, as determined by the

requirements of the staining operation. Since the sofa requires substantially
less staining time, and because it has higher throughput, it is the most
profitable product.
13-34
Pricing
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.
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.
13-35
Pricing
13-53 Theory of Constraints ( 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 CPC to meet all the
sales demand of Polymer 1 and to advise customers of Polymer 2
there would be some delays in the shortterm. Then, CPC 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.
First: Identify the Constraint

Total Time Required for Each activity for Given Demand
Time Required for Total Time Slack
Polymer 1 Polymer 2 Time Available Time
Filtering 60x2= 120 40x(2+2)= 160 280 320 40
Stripper 60x(1+1)= 120 40x(2+1)= 120 240 320 80
Reactor 60x3= 180 40x5 = 200 380 320 -60
Final Filter 60x2= 120 40x 1 = 40 160 160 0
Mixing 60x3= 180 40x3 = 120 300 320 20
The reactor is the constraint , since there is a demand of
380 hours but only 320 hours available.
13-36
Pricing
Second: Identify the most profitable product
Third, Identify the most profitable product mix

Since Polymer 1 is the most profitable product, its total demand of 60
is filled first. The remaining time on the reactor is used to complete as many
units of Polymer 2 as possible:
Capacity of reactor available for Polymer 2 = 320 60 x 3 = 140
140/5 = 28 units of Polymer 2
13-54 Theory of Constraints (30 min)
13-37
Pricing
1. Bakker will not be able to meet the demand. Department 1 is a

constraint, based on machine time. We do not consider labor time
because Bakker is able to hire and retain all the labor it needs.
Departments
1 2 3 4
Machine Hours needed
611 1,000= 500= 1,000= 1,000=
500x2 500x1 500x2 500x2
613 400= 400= 0 800=
400x1 400x1 400x2
615 2,000= 2,000= 1,000= 1,000=
1,000x2 1,000x2 1,000x1 1,000x1
Total hours needed 3,400 2,900 2,000 2,800
Hours Available 3,000 3,100 2,700 3,300
Excess (deficiency) (400) 200 700 500
2. The best product mix is 400 units of Product 613, 500 units of
product 611, and 800 units of product 615.
611 613 615
Price $196 $123 $167
Variable Cost* 103 73 97
Throughput/unit $93 $50 $70
Machine hours in Dept 1 2 1 2
Throughput/hour $46.50 $50.00 $35.00
* For example, variable manufacturing cost for 611 = $93 =
(7+12+21+24+9+27+3)
Production/sales Plan (Product 613 is most profitable and goes first,

then 611, and 615 is last) 400 units of 613 and 800 units of 615.
Total hours available in Dept 1 3,000
First: 400 units of 613; 400x1 hours 400
Second: 500 units of 611; 500x2 hours 1,000
Hours remaining
1,600
Third: 800 units of 615; 1,600/2 hours per unit = 800
All 3,000 hours used
13-38
Pricing
13-55 Life-Cycle Costing; Ethics (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.
2.
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 dev. (720,000) (180,000) (900,000)
Selling expenses (80,000) (20,000) (100,000)
Profit before tax $300,000 $ 200,000 $ 500,000
The life-cycle product line profitability analysis shows a much different

result. Profit before tax is comparable for the two products.
Now, the two products have the same return on sales. 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). Calculation return on sales (not required) shows that each
product has the same return under life cycle costing.
Return on Sales $300,000 $ 200,000 $ 500,000

$3,000,000 $2,000,000 $ 5,000,000
= 10% = 10% =10%
13-39
Pricing
3. Tim should recognize, as the results in part 2 show, that Xderm is not as
profitable on a life cycle basis as it is on a gross margin basis. In fact, it
has the same return on sales as the existing product Yderm when life
cycle costs are included. Tim should present the data shown in part 2
and explain that Xderm has been a successful product, but perhaps has
not achieved the very high level of success he may have promised. To
present the gross margin data only would be misleading and therefore in
conflict with his responsibility for integrity under the management
accountants code of ethics (chapter 1).
13-40
Pricing
13-56 Theory of Constraints for a Restaurant (80 min)

Note: 13-56 is a challenging problem with several difficult steps.
1.
a) At the current level of demand, there is sufficient capacity in

each of the four activities; see column headed Slack above.
b) 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).
13-41
Pricing

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.
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.
13-42
Pricing
13.56 (continued -2)

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.
The restaurants total monthly throughput is $124,332, a substantial

increase of $20,956 over the current total throughput of $103,376.
13-43
Pricing
3.
The throughput with the added capacity would increase to $128,544 per
month, a $4,212 increase.
13-44
Pricing
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/
13-45
Pricing
13-57 Life Cycle Costing; Health Care; Discounting (30 min)
If Cure-all were to manufacture the drug in-house, at a sales price of

$235, the life-cycle costs, revenues, and operating income for five
years would be the following:
Price $235
Units Sold 3,000,000
Revenues $705,000,000
Costs
R&D $1,000,000
Clinical Trials $2,108,000
Manufacturing
Fixed $5,000,000 x 5 = $25,000,000
Variable $68x3,000,000 = $204,000,000
Packaging
Fixed $380,000 x 5 =$1,900,000
Variable $20 x 3,000,000 = $60,000,000
Distribution
Fixed $1,125,000 x 5 = $5,625,000
Variable $6.50 x 3,000,000= $19,500,000
Advertising
Fixed $2,280,000 x 5 = $11,400,000
Variable $12 x 3,000,000= $36,000,000
Total Cost $366,533,000
Operating Income $338,467,000
13-46
Pricing
Outsourcing the manufacturing would result in the following five-year

life cycle costs, revenues, and operating income:
Price $235
Units Sold 3,000,000
Revenues $705,000,000
Costs
R&D $1,000,000
Clinical Trials $2,108,000
Manufacturing
Fixed $1,500,000 x 5 =$7,500,000
Variable $80 x 3,000,000= $240,000,000
Packaging
Fixed $380,000 x 5 = $1,900,000
Variable $60,000,000
Distribution
Fixed $1,125,000 x 5 =$5,625,000
Advertising
Fixed $2,280,000 x 5 =$11,400,000
Total Cost $385,033,000
Operating Income $319,967,000
Outsourcing the manufacturing results in a lower operating income

than manufacturing the drug.
13-47
Pricing
Problem 13-57 (continued -2)
It appears that selling the drug patent is the best alternative since
receiving $425,000,000 ($300,000,000 + $25,000,000 x 5) over the
five-year period is greater than the operating incomes of both the other
options. However, in order to determine the real value of selling the
patent one needs to consider the present value of the annuity, the
$25,000,000 at the end of every year for the next 5 years. Assume a
discount rate of 10%, and the present value of the five-year annuity
(an annuity factor of 3.791 at 10%) is $25,000,000 x 3.790787 =
$94,769,669. Thus the total value of the sale of the patent is
$94,769,669 + $300,000,000 = $394,769,669. The best alternative is
selling the patent.
13-48
Pricing
13-58Constraint Analysis; Flow Diagram (Appendix) (60 min)
1. Grace Vanders accelerated delivery schedule is unsatisfactory in

cutting 10 days from the total project schedule because not all of her
crashed activities are included on the critical path. The critical path is
ABGEFJK, 65 days, the longest path through the diagram.
In order to reduce the completion time for a project, activities along the
critical path need to be chosen to be crashed or reduced. Vanders
selection of activities FJ, EF, and BG, which are on the critical path
ABGEFJK, will reduce total project completion time only by three days
but her selection of activities HJ, GH, CD, and DE have no impact on
the critical path and thus will not reduce project time.
2. Below is a revised accelerated delivery schedule that meets both
objectives: (1) delivery of the first plane two week (10 working days)
ahead of schedule, and (2) at least incremental cost to Coastal. All
the paths need to be evaluated when reducing a projects completion
time. However, the selection of activities to crash should be taken
from the critical path first and then the activities should be selected in
order according to the smallest crash cost. The critical path now
becomes ABCDEFJK and will take 57 days, having only reduced the
total project completion date by eight days. Therefore, the activity CD
(the next least costly available activity) needs to be crashed two days
which will then bring all paths to 55 days or less.
Activity Days Incremental Incremental ABGEFJK ABGHJK ABEFJK ABCDEFJK
Crashed Reduced Cost per Cost
day
START 65 53 45 64
FJ 1 $ 400 $ 400 64 53 44 63
EF 1 800 800 63 53 43 62
JK 1 900 900 62 52 42 61
BG 2 1,000 2,000 60 50 42 61
AB 4 1,200 4,800 56 46 38 57
GE 1 1,300 1,300 55 45 38 57
CD 2 700 1,400 55 45 38 55
Total $11,600
3. The total incremental costs Bob Peterson will have to pay for this
revised accelerated delivery schedule amount to $11,600, or a new
total project cost of $76,700 from the original $65,100, and a saving of
10 days.
13-49
Pricing
13-59 Production Planning and Control (30 min)
There may be a happy ending to this story if Kristen and Bryan

change the focus in the plant from productivity at each work station
and meeting budgets to a focus on speed and throughput. The
current emphasis on productivity at each work station has the effect
that each employee has the incentive to work very hard to meet their
productivity targets, without a consideration of the overall productivity
of the entire plant. This is why work-in-process inventory builds up in
places. Some operators are keen on moving the product through their
work stations, and not concerned about what happens to it
downstream.
Also, the emphasis on meeting cost budgets (as in the case of
the purchasing department manager), creates incentives to reduce
costs in ways which can cause delays and defective products. The
purchase of discounted material which apparently led to product
defects is an example.
The emphasis on individual productivity has other effects. Since
it creates a focus only on moving product through individual
processes, inadequate attention appears to be given to equipment
maintenance or to the prevention of defects. There is insufficient
attention to preventing quality defects. In contrast, there is excessive
attention to correcting defects (re-work). To speed up the process, the
rate of defects has to be reduced. The emphasis on correcting
defects merely slows things down. Six-sigma firms such as Toyota
and GE have learned it is less costly as well as faster to prevent
defects rather than to spend time on inspection and re-work.
Inspection and re-work are non-value adding processes that should be
eliminated.
Another unfortunate result of the cost allocation method in the
plant is that department managers apparently have the incentive to
reduce the amount of space in which they operate in order to reduce
the overhead costs allocated to them. This means that some work
stations, for example Eds, are possibly too small for efficient
processing, leading to lower productivity and increased defects.
Again, the focus of the accounting system has set things awry, and
provided a dysfunctional incentive.
13-50
Pricing
To repair the situation, Kirsten and Bryan should refocus the

plant on throughput and use a system like the theory of constraints.
With the theory of constraints, managers and employees are rewarded
for moving total product through the plant, not just through their
individual work stations. Everyone in the plant has the incentive to
look for bottlenecks and to find ways to reduce the effect of these
bottlenecks. Moreover, employees have the incentive to work together
to reduce the bottlenecks and improve throughput, since the focus is
no longer on individual productivity, but on overall productivity, which
is the plants ultimate goal.
Summary Presentation of Problem on Chalk Board:
Problem Areas Manufacturing Outcomes Profit Outcomes
Materials quality Defects up Costs up

down
Cramped space
Focus on speed
everywhere Reduced
(no concern for Throughput Orders delayed, some
downtime or orders and profits
throughput..) lost
WIP up
Increased
holding cost
13-51

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Chapter 13 - Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic

13-7 There are five steps in TOC analysis:

Step One: Identify the Constraint

Step Two: Determine the Most Efficient Utilization of Each Constraint

Step Three: Maximize the Flow Through the Constraint

Step Four: Increase Capacity on the Constrained Resource

13-8 TOC emphasizes the improvement of throughput by removing or reducing the

Functional analysis is a process where each major function or feature of the

13-19 Current profit per unit = $50 - $ 38 - $8 = $4/unit

13-20 Price = 1.4 x ($38) = $53.20

13-21 Price = 1.10 x ($38 + $8) = $50.60

13-22 The introduction phase

13-24 20 days: May 1 to May 20

13-25 2 days in production (May 19 -May 20) = .1

13-26 Kaizen, continuous improvement

13-27 $140 ($140 x .25) = $105

13-30 Target Costing (15 min)

Thus, the target cost to meet the competitive price is:

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

13-31 Strategic Pricing with Rising Commodity Prices (20 min)

13-32 Manufacturing Cycle Efficiency (10 min)

MCE = total processing time/total cycle time

= 23/(23+3+6+3+1+5+2+6+2) = 23/51 = 45.1%

The level of MCE is best interpreted by reference to the prior MCE

13-33 Takt Time (10 min)

Total manufacturing time = 70hr x 60 min x 60 sec = 252,000 seconds

= 252,000 = 30 seconds per unit

2. The processing line is not properly balanced. Operation 2 exceeds Takt

3. The strategic role of Takt time is to help operations managers to balance

13-34 Life Cycle Costing; Service Departments (20 min)

As the strategic goals of the organization change, the focus on different

13-35. Target Costing (30 min)

Cost and Activity Usage for Each Product Current Revised

Direct Materials $ 143.76 $ 66.44 $ 78.65 $ 42.45

Price $ 1,050.00 $ 725.00 $ 825.00 $ 595.00

13-35 (continued -1)

4. Target costing should be useful to BSI to assist the firm in meeting

13-36 Target Costing in a Service Firm (20 min)

Cancun: ($750 - $649 total costs)/$ 750 = 13.47% profit margin

2. Cancun ($710 - $649 total costs)/ $710 = 8.59% profit margin

13-37 Target Costing (20 min)

1. Cost per unit = ($4,500,000 + $1,750,000 + $750,000 + $5,000,000) /

2. Machine setups do not add value to the golf carts.

4. Cost must be reduced by $3,000 - $2,850 = $150. First and foremost,

Labor and materials costs should be reduced by $43.75 + $37.50 = $81.25.

13-38 Pricing (25 min)

13-39 Life Cycle Pricing (20 min)

Total variable costs $2.50 + .50 + .50 = $3.50

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

13-40 Sales Life-Cycle Analysis (5 min)

Activities and Market Characteristics Life Cycle Stage

13-41 Pricing Military Contracts (10 min)

This is a complex issue which Pentagon officers and congressional leaders

13-42 Target Costing Using QFD (20 min)

13-43Target Costing in a Service Firm (20 min)

Price $810 $1,520

ICU 100: $81/$ 810 = 10% profit margin

ICU 100: $21/ $750 = 2.8% profit margin

13-44 Target Costing, Strategy (15 min)

2. Machine setups do not add value to the tables.

4. Cost must be reduced by $800 - $725 = $75. First and foremost,

13-45 Target Costing (20 min)

TC = $1,500 - .2 x $1,500 = $1,200