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business
cost management strategic

Cost Management Strategies For Business Decisions 4th Edition Ronald Hilton, Michael Maher, Frank Selto - Solutions

One-Day Shades Corp. is considering expanding its Las Vegas manufacturing operations. It can either convert a warehouse that it owns in the suburbs, or it can expand its current plant downtown. After the board of directors approved the expansion, George Wilson, the controller, set about to
Barbara Ciruli joined Toscana Corporation of Florence, Italy, as a financial analyst three months ago.She is about to make her first presentation to the management committee responsible for selecting strategic investments. Ciruli has two proposals that require the same investment cost and have the
Liquid Chemical Company—Part 2. Use the information and analyses from Case 14.76 to continue the case. Liquid Chemical’s chief competitor is being investigated by the Environmental Protection Agency (EPA). The competitor is facing punitive action for repeated violations. The most serious
Consider that Bootstrap Industries did not have unemployed resources when the state made the special cleanup order.a. Does this situation affect the pricing of the special order?b. What bid price do you recommend in this situation?
What are the risks if Bootstrap Industries always values job creation more than covering its costs?
Should Bootstrap set its prices to increase employment or to generate funds for internal investment
Why might a manager inappropriately consider sunk costs
List and briefly describe each of the five stages of the when making a decision?decision-making framework.
What considerations other than costs are relevant to
Distinguish between an organization’s goals and tangible outsourcing decisions?objectives.
Traditional accounting systems record only actual
Distinguish between target costing and target pricing. transactions. How can opportunity costs, which usually
Describe a conflict that might occur between accuracy, ae Bot ee ee timeliness, relevance, and cost of information. making?PNG REW t chiteria must be catished for information to be
Explain several legal influences on pricing decisions.relevant?
Explain the following assertion: “Price setting generally
“A quantitative analysis allows a decision maker to put Tequires:a balance between matket forces and cost a price on the total value of qualitative characteristics in considerations, a decision situation.” Explain this statement and give an
Explain how a company develops its target price and example. target cost.
Give two examples of sunk costs and explain why these
Explain the relationship, if any, between life cycle costs amounts might be both useful to and irrelevant in decision and the pricing of goods and services.making.
Distinguish between price discrimination and predatory pricing.
Respond to the following statement: Benefit—cost analysis is completely different in nonprofits such as Bootstrap because they have no profit to measure the value of alternatives.expected profits, you won’t have to answer the angry questions from stockholders and analysts because our share
With our high fixed costs, high variable costs, and competitive markets, there really is little we can do to increase our profits. Should you accept this argument without question? Explain.
The manager of a telecommunications company once commented, Not all future costs are relevant to business decisions, but costs are not relevant unless they occur in the future. Is the manager correct? Explain.
In the long run, we need to achieve superior quantitative financial performance. But in the short run we need to achieve superior qualitative, nonfinancial performance. Is this correct? Explain.
CEO: It’s all well and good for you to say that I should disregard sunk costs when I consider whether to sell this unprofitable operation. After we report lower-than medium-size retailer of upscale retail goods is onsidering outsourcing its data-processing, human resources, billing, and legal
A manager in your organization has just received a special order at a price that is below cost. The manager points to the document and says, These are the kinds of orders that will get you in trouble. Every sale must bear its share of the full costs of running the company. If we sell below our
To go from Dallas to Los Angeles for a business meeting, ney Wilkinson booked a flight for $950 with a departure on Wednesday and a return on Friday of the same week. The reservation agent told Nancy that if she were to return on Sunday, the ticket price would fall to$288. What factor(s) did the
Customers, costs, competitors, cost-plus formulas, and target-costing procedures all play a role in the pricing of goods and services. Sometimes the pricing process is relatively straightforward; on other occasions, it is more complex. The preceding factors and the procedures followed often vary
Give an example of an information item at each extreme level for the following information dimensions.Example of Information at Information Dimensions Very High Level Very Low Level Subjectivity 2 ?Accuracy # @Timeliness v ?Cost 2 ?Relevance 2 ?In recent years, the number of new cars leased by
Match the cost(s) most likely to be relevant to each listed decision.Decision Cost Accept a special order Internal unit-level manufacturing cost Close a plant Cost to buy externally Launch a new product Opportunity cost of alternative use Make or buy a product component Cost paid for parts on hand
Match the cost(s) most likely to be relevant to each listed decision.Decision Cost Accept a special order $15 internal unit-level manufacturing cost Close a plant Increased employee turnover Launch a new product $20,000 opportunity cost of alternative use Make or buy a product component $20 cost
Consider the quantitative costs and benefits of two alternatives. What must be the value of the qualitative factors if the less profitable alternative is chosen?Cost or Benefit Status Quo Alternative Revenues $50,000 $50,000 Costs $30,000 $40,000 Quality ~ Medium Very high Meets production
Consider the quantitative costs and benefits of two alternatives. What must be the value of the qualitative factors if the less profitable alternative is chosen?Cost or Benefit Alternative ! Alternative 2 Cost savings $20,000 $30,000 Flexibility High Medium Quality Very high Medium Meets delivery
Locate a recent article on outsourcing practices. Complete the following requirements based on the article.Requireda. What are the major reasons for the decision to outsource?b. What are the major concerns about outsourcing?c. Which business functions are outsourced?
Replace the question marks with information based on markup over cost for A-E.A B Cc D E Unit-level cost $12 $20 $32 $8 $60 Product-level cost per unit $6 $22 $12 ? $24 Facility-level cost per unit $15 $16 z. $3 $16 Mark-up percentage 25% i 40% 100% 15%Price per unit @ $87.00 $71.40 $54.00 ?
company was nearing the completion of a home for Jan and Bill Kennedy when the couple suddenly declared bankruptcy. At that time, SDC had invested $1,525,000 in the project.The firm can sell the uncompleted residence “as is” to a new buyer for $1,400,000, or it can invest another $160,000 to
Chavez Digital Machining’s performance for the first 11 months of the year has been a surprise with sales and profits somewhat above expectations. On December 20, just prior to the holiday break, Patrick Olmec faced the decision of scrapping some old equipment and replacing it. The old equipment
MicroStorage Technology (MST) is developing a high-speed modem to connect handheld computers Problem 13.44 with a satellite-based data network. Cost Reduction{LO 4)Requireda. Given the following information, compute MST’s cost-reduction target.EXpeClealiMalkeupnlCCr.ccccgu tay. ther
Mercy Hospital is a private hospital that serves an aging population. The hospital administrator, Donna Cost Reduction Morgan, believes that insurance companies and Medicare will move to fixed payments for specific pro- (LO 4)cedures, which will put increasing pressure on hospitals to control
Black Diamond, Inc., has been manufacturing 5,000 units of part 10541 per month. At this level of pro, a ee duction, the company’s costs (expressed on a per-unit basis) follow. (LO 2,4)W]iTTeleWel Melos oeer beter sbaeneno: Per onont cect ceeanecenance $40 FICHE ENTE CLOW teresg o separ one
Chapman & Tracy is a regional firm that offers audit, tax, and consulting services. The partners are concerned about the profitability of their audit business, and a closure decision might be forthcoming. If the firm drops the audit activities, it might do more tax work. Only 30 percent of the
Buy-U Deli’s owner is disturbed by the poor profit performance of her ice cream counter. She has prepared the following profit analysis for the year just ended:SASS aso ebend sicece va ee deed ce Pe Ot ES leg ee oe OM ee $45,000 EeSSiHCOSt OO OCIR SEE SOR Ie crete eter cement yore car echt meee
Marlene Judd is a 55-year-old science teacher at Lamar Tech. She is considering leaving the teaching profession next year and going to graduate school to earn a master’s degree in business administration(MBA). Judd plans to attend a prestigious university as a full-time student. The MBA takes two
Obtain a copy of the article “The Environmental Impacts of Genetically Modified Plants: Challenges to Decision Making,” by Sandra Batie, American Journal of Agricultural Economics 85, no. 5(2003):1107—1111. Work in small groups to develop a 15-minute presentation that completes the following
Maytag Corp. recently purchased rival Amana Appliances and is consolidating its manufacturing and assembly processes. Maytag now wants to reduce costs for the combined businesses by moving some labor-intensive assembly operations to Mexico. The new assembly plant, with an estimated initial
Obtain a copy of the article “Unlocking the Benefits of World Trade” by Jeffrey Schott, The Economist, November 1, 2003. Work in small groups to develop a 15-minute presentation that completes the following requirements.Requireda. Use the decision-making framework presented in Exhibit 13—1 to
Build an Excel spreadsheet to set up a spreadsheet like the one in Exhibit 13-3 and make individual changes except for requirement (e). Indicate how each affects the choice between methods. Make each of the following changes independently of the others except for requirement (e).a. Expected market
SciFi Paperback Books is an Internet retailer of science fiction paperback books. Based on a sales vol- —_C ogt Reduction ume of 200,000 units, the projected net income for the current year is $700,000. The company has been (LO 4)selling the books for an average of $15 each; unit-level costs
A financial analyst is studying two new distribution systems, basic and deluxe. The basic system has unit-level shipping costs of $8 per unit and annual facility costs of $500,000; in contrast, the deluxe system has unit-level shipping costs of $4 per unit and annual facility costs of $780,000. The
Xyon Company purchases 10,000 pumps annually from Kobec, Inc. Because the price keeps increasing and reached $88 per unit last year, Xyon’s management has asked for a cost estimate to manufacture the pump internally. Xyon makes stampings and castings and has little experience with products that
Melville College is a small liberal arts school located in Massachusetts. It is evaluating its botany program because the program’s tuition revenues and costs recently produced an $80,000 loss, which is typical of performance in the past few years. Tuition revenues earned totaled $320,000;
The director of development reports that Florence Ficus, an alumna and supporter of the botany program, is now sole owner of the highly successful Ficus Scientific Corporation. Ficus has designated the college as a major beneficiary of her estate.Required_a. Should Melville drop the botany program?
The radiology department of Community Hospital two years ago purchased an imaging device that cost$750,000. Its expected useful life was five years; however, this year an improved version of the imaging device is available. The improved version costs $900,000 but has a shorter operating life of
Cosmos Corporation manufactures collectible toy cars in a plant that has the capacity to produce 3,000 cars each month. Current monthly production is 80 percent of capacity. The normal selling price is $36;unit-level costs and facility costs for the current activity level are as follows:WiIFIEVEl
Framar, Inc., manufactures automation machinery according to customer specifications. The company operated at 75 percent of practical capacity during the year just ended with the following results:SalSSTEVGMUG mca ett cnneae ce eaeet eee cece nt ee $25,000,000 Less: Sales COMMISSIONS (10%)
Greenacres Construction Company wants to compute the life cycle costs of equipment used in its proj- pets es ects. Greenacres will use these life cycle costs to bid and cost its construction jobs. Although no rules (LO 4)govern life cycle costing by private companies, Greenacres wants to account
Quantorus Data Storage Company (QDS) wants to compute the life cycle costs of equipment used in its(LO 4) manufacturing process. QDS will use these life cycle costs to cost its data storage products. Although no rules govern life cycle costing by private companies, QDS wants to account for as much
The consumer price index (CPI) is used to annually adjust Social Security payments and the personal tax exemption (a subtraction from taxable income). The intent is to prevent inflation (a general increase in prices) from eroding benefits paid to retired workers and from inflating taxes paid. For
A pilot project sought to investigate the relative benefits and costs of PV arrays with backup dieselgenerators as village-level sources of electrical energy. The project examined the operations of 86hybrid plants that ranged from small (5—12 kilowatts), which served approximately 50 people each,
You have no doubt seen the sales-mix concept in action by observing recent trends in gasoline sales. The old-fashioned gas station has rapidly given way to the convenience store that also sells gasoline. Or in some cases, gas stations might be a partner with, say, Subway, BurgerKing, or McDonald's.
What is the effect on break-even and target volumes and profit from the changes in sales volume and sales mix?
Explain how the changes in outcomes were caused by the actual inputs.
What does a cost-management analyst need to know to build useful financial planning models
What is the manager trying to manage (i.e., optimize)?
What are the parameters and the relations among the parameters that are relevant to managers’ decisions?
What are feasible ranges of parameters and realistic scenarios of combinations of parameters?
How do constrained resources affect managers’ ability to optimize operations? Can those constraints be relaxed? For example, can the organization obtain more capacity
Can financial models help define future risks so that managers at least know what the uncertainties are
Should organizations always try to maximize revenues or even the sales of products and services with the most throughput, contribution margin, or profit per unit? Are resource constraints an issue 12.1 12.2
Review the chapter’s key terms and define them.
What are the characteristics of a good financial planning model?12.3 12.4 12.5
What benefits do financial models provide to users?
What are the objectives of financial modeling?
What are the elements of a cost-volume-profit (CVP)model? Is this the best name for this type of model?
Explain the difference between break-even point and target break-even point.
Explain how a cost-volume-profit (CVP) graph is also a financial model.
What are the advantages of computerized financial models compared to manual financial models?
Why should a financial model’s parameters be located as numbers in only one place?
When is using the average tax rate desirable in modeling the effects of taxes in a financial model?
Explain the sales mix assumption in financial planning analysis. Why is this assumption made?
What is the meaning of the term “weighted-average unit contribution margin?” What does this amount contribute toward covering?
What is the difference between using throughput or contribution margin as the contribution toward profit in financial planning models?
Briefly explain how financial planning models benefit from activity-based costing (ABC).
What is sensitivity analysis? Scenario analysis? What are their purposes?
Briefly describe the proper approach to making a production decision when a single limited resource is involved.
(Appendix A) How is the Theory of Constraints as much a cost-management attitude as a modeling method?
In a strategy meeting, a manufacturing company’s president said, “If we raise the price of our product, the company’s break-even point will be lower.” The financial vice president responded by saying, “Then we should raise our price. The company will be less likely to incur a loss,” 4
A company recently constructed a financial planning model to predict monthly cash inflows and outflows.The model is based on various financial relationships including collection patterns of receivables, inventory outflows, expense payments, and so forth, all obtained by analyzing monthly data of
Cost-volume-profit (CVP) analysis is an oversimplification of the real world. For this reason, it has little to offer a decision maker. Comment.
Picture the cost-volume-profit (CVP) model. Explainhow —
(Appendix A) Proponents of the Theory of Constraints the model can be used to evaluate the performance of an approach to managing processes argue that managers organization’s (1) divisions and (2) divisional managers. should review every task or operation performed in an The managers are
P laagenen notes that the contribution from one product you believe this test can be applied to every task in an is higher than the contribution from a second product. organization? Should every task that fails the test be Hence, management concludes that the company should eliminated?
Respond to this comment: We are unable to meet demand what, if any, conditions will this approach result in for our product, yet you refuse to let us operate all our P aximum profits? fo he Tees processes at least at practical capacity. I think that is a
eee goods retailer is running a monthly special waste of equipment and personnel. What am I supposed—that prices tennis balls and golf balls to yield a negative to do, have them sweep the floors and let this expensive contribution margin. What causes a negative contribution equipment sit
One of your company’s top salespersons approaches actions? lo SiG lez fer Cmicts Proced lose e— you and says, I just heard that I am not allowed in the
You have built a fairly complex financial planning model ?* ite production area anymore because you have outlawed for your organization. It contains many parameters and Ca Wy, our efforts to push customers’ orders through the assumptions about how the parameters are related. When / “4 +o
You and your cost-management team spent months building expediting of customers’ orders by sales personnel.and testing a financial planning model of your organization’s
(Appendix A) Provide possible reactions to operations. When you previewed the model to a long-time recommendations to implement the Theory of Constraints manager, her reaction was, I don’t trust computer models from the perspective of an employee in a:any more than I trust manual election counts.
Canyon Escape sells individual tickets for $75 for walking tours of the Grand Canyon. Unit-level costs including lunch, are $15 per ticket; fixed costs total $200,000 per year.Required 7S / Ses66-cGa. How many tours must be sold to break even? 2 o8a0.0 [G2 = 2 33 Yb. What level of revenue is needed
Delta Safety Systems manufactures a component used in aircraft radar systems. The firm’s fixed cos P : : Cost-Volume-Profit are $3,000,000 per year. Delta’s variable cost of each component is $3,000, and it sells the component (LO 2,3) v for $5,000 each. The company sold 2,000 components during

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