lly iprean ae by i rare 6 OP « bay dee 2 nd Hg axe ie droms. The EPIIEN WOU ‘Chapter 6 ‘A decision about whether 10 MKS oa ee etal “The choices facing the company #°: “Atermaive 1; Rent new eaaipment od cot Tented for $135,000 per Ys a Be Sacha os rans font suppl ye new equipment would be wore TCA AY been ws facture, WOM! ising and, according 1 the mn a oats by 30%, The old equipment has 90 jon cost 45.000: ya See rcertts com pr drum would nat be efi i ‘ew equip pacity would be 90,000 crums pet 368 Tr eon’ eal general company oven would Requited: Reruied una 60,000 druas are needed exet HG aes ey of baying ie dros fom a OU supplier? 9, Ginette) 500 drums ae needed cach YoU Vt "she financial advantage (dsagya. Ayr toying the drums from an outside supe? a eens that 90,000 drums are needed) e268 Yon svhat is the financial dGiendvamage of buying the drums from an cutie 4, Whatethe actos woud you recommend that ths Ona SS wwe tm ve unaffected by this decision, what is the financial advan CASE 6-20 Sellor Process Further Decision LOG=7- “The Scotie Sweater Company produces 4 ‘ool and proveses tino woo yarn from which dl required o produce one sweater. TheOttery the market for sweaters ig ty " Analysis The Key to Decision Making war ns whee the seater ae mn Me ao sl me S0ld. Thi, ve 10 un “i seing price OF (Ne sweaters to $39 ‘a has made ic fo unusually warm weather in the west oe OE the pe nr SSE er copy dc Mahe 0 PROCESS into sean MU Price. Since he market for woo) yarn ithe discontmd:she supe are ME aes mange ee the yar so eld ou SUIS er 4.0 pro geet i a te tin ncn wn a large POrtON Of the factory. He grea PRdUCtiON separ 2 oss When the yarn abuses He argues mat he compere does not want 9 close All ofthe manufacturing overteag cn 2% Score sremmgy TIM SEALE uses, not the oc ascomtnued. Manulactring yyrag ne 8 an woul ls a a ead ages Pl a ean ni sues bor Ost ae varie |” MACS on the basis of 150% of direct ae (ai into a sweater? (Gs9620192) of Free pocening cae! a eee ing one spindle of wool yarn 2. Would you recormeed hth Woo] yarn eso 3. Whatis the lowes orice thatthe company snap leh or processed int sweaters? Expla ‘th appropiate computations and ean, 2 pl ourremoreeg OTs? Seep yoann f ase 6-20 Ethie andthe Manager: Shut Down Romeros Down oF Continue Operations L06-2 had just be i just been appointed vice pres, Services Corporation (BSC). The compuc, Prsi“ent ofthe Rocky Mountain Region of the Bank any provides ric banks end checks presented fr deposi or pg ek Preesting sarvics for snl Banks : Ms, Romer epee Bee rent fr the justeended fiscal year from the region's contaller ohn Lichen wie tomeros follow the standariized format : ; required by corporate reports, That report follows specified that the financial report should yeaiguarters forall regional performance: eure Hn pec eae lata Total Great alle ‘sales $50,000,000 $18,000,000 Operating expenses: Ssoov0000 sss.900.000 edt abor r vcus 3200000 «12500000 ©+—11,000.000 Variable overhoad ae eooos ee ee Equpment deprecation 3200000, 1,300,000 1,400,000 Facity expense”: 2.200.000 '300,000 {200.000 {cel acministtive expenses... 450.000 140000 130.000 Regional administrative expenset . 1,800,000 600,000 840,000 Corporate administrative expense’. 4,750,000 1,300,000 4.710000 Total operating expense <..2esesssesess Tasa50000 17590000 _15,820,000 ‘Net operating income (055)... -- .. $.3,750000 -$_2,310000 $2080.00 “includes bulging rental expense for the filings end Greet Falls ocations and bulding depreciation forthe Clayton location Jatative expenses incurred ate cheek processing centers. é to the creck procesing centers based on sles. to segments ofthe company such a the Rocky Mountain R328 ee syn tebe fir an explanation Ms. Romeros sui oe etial Re : Santee sory on cuca AME peavey Fizettar Nos the Cyan fil ze a sca) market and bid VETY ABBTeSsiygy ea the eed costs —Particularly then fay fet the petiors ent : ait 1 bid: Cay act, we had to lay Off a Jog ge” ould not but we eo facili is Clayton's employees sities very cheaply at Billings rah: Me ve had them built. Unfortunagly as com jepreciation charges On the fail jrion a the time and Could charge me ‘big cost overruns. The con peoject budget. The | have much & and in fact went to finish the work, W pai ida’ matter at fest because we Romerons Welw a So hal a She aganst that. THe SH xt facility should last in ‘pankrupt before the P be oth 000 in facility depreciation atthe Clayton down. is bs Lintebear: [would advise agains costs a CaN ney two processing centers in the region, oat roe overhead costs, We might save $90.09) abo oF would not save any regional administrative 1s 9.5% of OUT sales a8 corporaie Romeras Wit about te oes Liebear: We sifted Cayton’ We wouldnt eating on eet native expense, Bul WE “ i id still charge 30 in local a expense and corporate headquarters WOU Sion, we ‘ent more space in Billings and Great Falls in order ‘would probably cost us at least $600,000 a ing to move the equipment from Clayton administra Tn addition, we would have 10 bande the work transfered from Clayton: that year And don’t forget that it will cost us some lings and Great Falls. And the move will disrupt service to customers, Ren eof at, bt a mone-tsig processing enter on my performance report is completely unacceptable. eh oy Litlebear: And it you shut down Clayton, you are going to throw some loyal employees out of work Romeros: That's unfortunate, but we have to face hard business realities Litiebear: And you would have to write off the investment inthe facilites at Clayton, ‘Romeros: can explain « write-off to corporate headquarters; hiring an inexperienced contractor to build the Clayton facility was my predecessor's mistake. But they'Tl have my head at head. quarters ifT show operating losses every year at one of my processing centers. Clayton has to go. Atthe next corporate board meeting, I am going to recommend the Clayton facility be closed. Required: | From te andpoit ofthe company a5 a whole, what isthe financial advantage (isadan- tage) of losing the Cayton processing center and redistributing its work to other processing centers in the region? Explain, 2. Why might it be in Haley Romeros's self-interest to shut down the ‘lt ; a : st ¢ Clayton facility? Do think Haley Romeros is conducting herself in an ethical fashion? Explain, on 5 Mbt influence should the depreciction on the facilites at Clayton have on prices charged Clayton for its services? ee y CASE 6-81 Integrate ase: Relevant Coss: icing LOS-1, L064 Wesco ed's only product is a combination fertf i Gms cn tentie ls Omed inget Nursery plans to sll a similar fertlizerhweed ompound through its regen! ‘ Ikill hursery chain under its own private label. Zwinger doce not ae ae of isDita sy soit has Asked Wo mie Arata wage a thc "88 The Key to Decision Making wire "el Order of the privag oN Priv ies) 10 mee sn, SPAN ay a om “The Zwinget Compound yo mld sect labor-hours andl the fone, submit bi for vanufacturing and mand toy 2 on singer. While the chemical ‘row Weed. the manufacturing pro roa lowing ch laced in micals, "M-POUNA Tots. Each tex would require 3, KL r-6.was used in another compound nat Wesco had on hand when the dling expenses. fated for AG-5 on a one-for-one u onl for-one basis without ates sed in GrowNWeed, can be substi- aH 3in metry an a slog vale of Sg, TE EA ofthe Zing como The ventory and cost data forthe che sedown belowr "CUCTCAs th et onde ee ee ‘The current direct labor wage rate is $14 per hour. The predetermined overhead rate is based on direct labor-hours (DLH). The predeterinined overhead rate forthe eurrent year, based on a two- shift capacity with no overtime, is as follows: Variable manufacturing overhead . Fixed manufacturing overhead. Combined predetermined overhead rate....... Tc nen ‘Wesco’s production manager reports that the present equipment and facilities are adequate o manufacture the Zwinger compound. Therefore, the order would have no effect on total fixed manufacturing overhead costs, However, Wesco is within 400 hours of its two-shift capacity this month. Any additional hours beyond the 400 hours must be done in overtime. If need be, the winger compound could be produced on regular time by shifting 2 portion of GrowN Weed pro- duction to overtime. Wesco's direct labor wage rate for overtime is $21 per hout, There is no allow- ance for any overtime premium in the predetermined overhead re 5 7 smit a bid for the 20,000 pound order of Zwinger’s new compound, Jivered by the end of the current month, Zwinger has indicated that this ‘that will not be repeated Calculate the lowest price that Wesco could bid exactly cover its incremental manufactoring costs S300 per DLH 10.50 per DLH 5 DUH 329Chapter 6 * ‘to the origit zpoyaud Jets of the new & reson eet shift ity. However, pate ould be complete dria oi DO oul este tempor regular time. Curent res ana ak incuing xed maniacrig ove Zovinger Nise for each 20,000 pound fC treated asm produc an tis pace P doe 106-3 106-5 na nae oooios 106-110 i 6-52 ake ory Dens ee, os ad ce cori are a oroc coarse tT ad Seer tn wnt cunt wanes PORE Sn racine ar ate nate prein BEL Tan canany on he etn. Beas FA fear coon red 2 500 eg eae ge WY asm Te asx era Tancal daseomecing be WWD a Selling price per drum... Cost per drum: Direct materais ae Direct bor ($18 per hour) Manufacturing overhead... Selling and administrative expense Margin per dium ‘Management believes 6,000 WVD drums could be sold each year if the ¢ cient manufacturing capacity, As an alternative to adding another welding ‘has considered buying additional drums from an outside supplier: Harcor plier of quality products, wouk be able to provide up to 4,000 of $138 per drum, which TufStuff would resell to its customers at its appropriate relabeling.‘Te bike fame ‘eng SO et: yD a woe! 1 alOCAEU 10 duet one Mth exiting ae 8 ON the basis orpead consists Of fixed enn of lset owsgole The variable manufionn 2% 50h ag pg and personnel, Manufacturing "hours. Most of the manufacturing on the factory build per bike frame, The y, le os 'y building, but some of it is sere om th ouside ganas MMiicrng ee ied at $1.35 pr WD dom and ‘ linis v “at an ‘incurred on drums. Selig and admiisentve expenses ae oul not be incurred on dra gy of the selling and adm located istrative expen Products onthe basi of Almost ‘able sel oe se ate of revenues. Ali ae weed a eam lie para, ht COON ct, ba nero Ra EE a 30 per bike fame, "tM 198075 pe Wb drum wheter aiada Be Allo the company’s employees ene ant company has aay oF ying ne quired: required! 1) Would you be comfortable relying onthe formaking decisions related tothe Wry 2, Assuming direet labor is a fixed cost, come an Oke frames? Why? * {Purchased WVD drums = SO8 “OMpute the contribution i ution margin per unit for: », Manufactured WVD drums he ¢ Manufactured bike frames, iy 3, Assuming direct labor is a fixed 2 Manufactored WD drums, “°™PWe the contribution many per welding hour for: &, Manufactured bike frames Tea 4. Assuming direct labor isa fixed com, determine number of WVD drums (if « should be purchased and the number of WYD drums aa ieee i (raagy vod oie len ee a te ince from this plan over current operat 2 tions? As soon as Your analysis was shown to the sauied ; «x got int0 an argument concerning how dnt ee eee decision. One manager argued that direct labor is always treated as a variable cost in textbooks and in practice and has always been combidered a yariale cost at TwIStuf, Afr ll, “diet” cans youcan directly trave the cost to proects, “If direct labor is not a variable cost, what is?” Another manager argued just as strenuously that dtect labor should be considered a fixed cost at TufStuf. Xoone haul been laid off in over @ decade, and forall practical purposes, everyone atthe plant is oo a monthly salary. Everyone classified as direct labor works a regular 40-hour workweck and overtime has not been necessary since the company adopted Lean Production techniques. Whether the welding machine is used to make drums or frames, the total payroll would be exactly the same, ‘There is enough slack, in the form oF idle time, to accommodate any increase in total direct labor time thatthe bike frames 5. Assuming direet labor is a variable cost, compute the contribution margin per unit for a. Purchased WWD drums, ed WVD drums, indizect—are id for fa ur ey Pid for full 40-hour work weeks 'm major recessions. ‘ivancal dts provided by he secouting department ‘determine the number of WVD drums (if any) that er of WWD drums and/or bike frames (if any) that should (decreasc) in net operating income that would result )LO6-1, LOS-2 yetures seals for automobiles, vans, trucks, and vari ‘a number of plans around the world, includingcrepter 6 vant at 40 68 Mg er Cover Pe ager is charwed tothe fetal he Te = oil rion mana me ihe ref Ted Vosilo Is the plan is budget er for the company from an outside vendor proxction manager civ ah fom an utile vn Cover Plant. that Qualsuppor i 192 cover Plait eS Von Voss ha ja ome anon! ct OF NE OST pe Dems Cove FIA SPSS ibm area oe a ite eet he Deer Cover Pay astonished athe how oui for the upcoming year was se econ rar orem beclosed dove. cane’ operating oot "The budget for Denver Co pent = 32009 aoe 33a Sept sana Hee eced soo. Perna a so ieee Gide Corporate expenses Total budgeted costs ating units based on total lants and other oper ~ Fixee corporate expenses allocated to plants an budgeted wage and salary costs : - stn og i so tt hase orders with major supple chasing Department was instructed to place blanket purc ae censure the ae ‘of sufficient materials for the coming year. If these orders are canceled 4; 4 consequence of the plant closing. termination charges would amount to 20% of the cost of direct materials, 7 ‘ b. Approximately 400 plant employees will lose their jobs if the plant is closed. This includes a Othe direct laborers and supervisors a8 wel asthe plumbers, electricians, and other sie ‘workers lasified as inter plant workers. Some would be able to find new: jobs while many others would have difficulty. All employees would have difficulty matching Denver Cover's base pay of $18.80 per hour, which is the highest in the area, A clause in Denver Covers contrat with the union may help some employees; the company must provide employment assistance fois former employees for 12 months after a plant closing, The estimated cost administer this service would be $1.5 million for the year. & Some employees would probably choose early retirement because QualSupport has an exe fen! pension pla. In ct, $3 million ofthe annual pension expense would continue wheter Denver Cover is open or not. bi 4. Vosilo and his staff would not be affected by the closi ‘They would sil asi : " ing of Denver Cover, te responsible for administering three other area plants, 6 Tithe Demer Cover Plant were closed, the company would realize shout As a Required: vie 1. Without regard to costs, identify identify the advantages to Q ‘ Sbiain covers from its own Denver Cover ae ISupport Coiter cceall Ay qualSon7" COFpOraON pan The Key to Deciion Mok reaher ROLLS Glens a em aes afi SNSphe annual budgeted Pigg AP%Al analysis Tide CORY Sy ct Macross wn ii Televant enim 60. has asked you to ident [a Ee tows ‘Any CONTECUTTINg costs thar ent ERIN show tne Ceeision regarai ‘nmr Sy ei Sahn mann en cooking Ae data you en ho TSN fhe lam, ad exp awe ere Stn a copa, e ftancial advantage isadvan- should consider before making adem al) Ei sou ‘mentioned in ‘sion, ‘med in the problem that QualSupport Denver Cone (CMA, adapted) ling market price for the product. lances, the supplier simply charges the pre- ve nee allow tit pata he has anh am In this appendix, we are concerned with the sess needs t0 Set its Own prices. ‘ore common situation in which a busi- For ei forall ofits flights. Accenture ‘code ety eet has to establish ticket prices from prospective consulting clients, Procter & Gamble has est nines in Beano Tide, Pampers, Crest, and its many other product finest tiaee caepoice sac pee Tide, are too high or too low it can dramatically decrease Fgh companies choose prices that Factors That Influence Pricing Decisions Many factors can influence how companies establish their selling pri 3 \ve'd like to discuss three of ee eeepc wd fos Customers Customers usually possess two things—latitude and private information — chat complicate the pricing process. In terms of latitude, the customer can choose to buy your product, ot a Competitor's product, or nothing at all. Customers also have private jnormation regarding their level of interest in your product or service and how much they tamper a ‘a scenario where a prospective customer invites numerous, in hopes of winning a contract. The customer has it can compare and choose among the bids submit ‘supplier sets a bid price that is oo high, the customer petitor. Conversely, if that same supplier is awarded the much lower than its competitors, it may forgo revenue { have been willing to pay. ‘continuously set bid prices for individual contracts: instead, to large volumes of diverse customers who do not have o pay a particular price fora given product. In these situa din quantifying the customers’ price elasticity of d « the degree to which a change in price af ‘ rvice is said to be inelastic if a ch Pode eee. On the other hand, demand for