Target Costing and Pricing

Exercise 8: Lovebug Company has determined that its new automotive hood screen would gain widespread customer acceptance if the company could price it at or under $30.  Anticipated labor hours and costs for each unit of the new product follow.

The company’s minimum desired profit is 40 percent over total production and delivery cost.  Compute the target cost for the new hood screen, and determine if the company should market it (Round to two decimal places).

Problem 5

Developing Transfer Prices

Sand Company has two divisions, Glass Division and Instrument Division.  For several years, Glass Division has manufactured a special glass container, which it sells to Instrument Division at the prevailing market price of $20.  Glass Division produces the glass containers only for Instrument Division and does not sell the product to outside customers.  Annual production and sales volume is 20,000 containers.  A unit cost analysis for Glass Division follows.

Corporate overhead represents the allocated joint fixed costs of production- building depreciation, property taxes, insurance, and executives’ salaries.  A profit markup of 20 percent is used to determine transfer prices.

REQUIRED:

1.  What would the appropriate transfer price for Glass Division to use in billing its transactions with Instrument Division?
2. If Glass Division decided to sell some containers to outside customers, would your answer to requirement 1 change?  Defend your response.
3. What factors concerning transfer price should management consider when transferring products between divisions?

   Exercise 4: Measures of Quality in a Service Business

   Rehab Health Care, LLC, incurred the service-related activity costs for the month that follow.

Prepare an analysis of the costs of quality for Rehab Health Care.  Categorize the costs as (a) costs of conformance, with subsets of prevention costs and appraisal costs, or (b) costs or nonconformance, with subsets of internal failure costs and external failure costs.  Compute the percentage of sales represented by prevention costs, appraisal costs, total costs of conformance, internal failure costs, external failure costs, total costs of nonconformance, and total costs of quality.  Also compute the ratio of costs of conformance to total costs of quality of costs of nonconformance to total costs of quality.

Exercise 9: Measures of Production Performance

Analyze the following nonfinancial measures of quality for Sweet Express, Inc., a supplier of novelty candy boxes, for a recent four-week period.  Focus specifically on measures of production performance.

Problem 4: Interpreting Measures of Quality

Circuit Corporation supplies integrated circuitry to major appliance manufacturers in all parts of the world.  Producing a high-quality product in each of the company’s four divisions is the mission of management.  Each division is required to record and report its efforts to achieve quality in all of its primary product lines.  The following information for the most recent three-month period was submitted to the chief financial officer:

	Macon Division		Dothan Division		Valdosta Division		Columbia Division
	Amount	% of Rev	Amount	% of Rev	Amount	% of Rev	Amount	% of Rev
Costs of Conformance
Prevention Costs:
Quality training of employees	$4,400		$15,600		$23,600		$8,900
Process engineering	3,100		19,700		45,900		9,400
Preventive maintenance	5,800		14,400		13,800		11,100
Total prevention costs	$13,300	0.95%	$49,700	3.11%	$83,300	5.55%	$29,400	1.73%
Appraisal costs:
End-of-process sampling and testing	$3,500		$19,500		$21,400		$6,900
Quality audits of products	6,100		11,900		17,600		8,700
Vendor Audits	4,100		10,100		9,800		7,300
Total appraisal costs	13,700	0.98%	$41,500	2.59%	$48,800	3.25%	22,900	1.35%
Total costs of conformance	27,000	1.93%	$91,200	5.70%	$132,100	8.80%	$52,300	3.08%
Costs of Nonconformance
Internal failure costs:
Quality-related downtime	$26,800		$8,300		$6,500		$22,600
Scrap and rework	17,500		9,100		7,800		16,200
Scrap disposal losses	31,200		7,200		3,600		19,900
Total internal failure costs	75,500	5.39%	$24,600	1.54%	$17,900	1.19%	$58,700	3.45%
External failure costs
Warranty claims	$22,600		$4,400		$2,500		$17,100
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