Ch18 Raiborn SM

Chapter 18
237
CHAPTER 18
INVENTORY AND PRODUCTION MANAGEMENT
QUESTIONS
1.
The three costs are costs of ordering, purchasing, and carrying inventory.
ThesecostsarepresentedinExhibit18.1withexamples.
2.
Apushsystemisaproductioncontrolsysteminwhichworkcentersproduce
inventory in excess of current needs because of lead time or economic
production/orderquantityrequirements.
Apullsystemofproductioncontrolisoneinwhichpartsaredelivered/produced
onlyasneededbytheworkcenterforwhichtheyareintended.Theoretically,
therearenostockroomswhereworkcenterspushcompletedpartsinexcessof
thecurrentneedsofrecipientworkcenters.JITisapullsystem.
3.
Companies must be aware of where their products are in their life cycles
because, in addition to the sales effects, the lifecycle stage may have a
tremendousimpactoncostsandprofits.Managingproductionactivitiesandcosts
requires an understanding of product life cycles to effectively and efficiently
engage in production planning, controlling, problem solving, and performance
evaluation.
4.
Target costing is a method of determining an allowable cost of making a

product by subtracting desired profit from the estimated selling price. Once a
productstotallifecyclecostsareprojected,theycanbecomparedtothetarget
costtodeterminewhetheradjustmentstotheproductdesignandmanufacturing
process are necessary before product engineers release the final design and
specifications.
5.
Itisinthedevelopmentstagethattheproductioncomponentsandproduction
processesaredetermined.Accordingly,mostproductioncostsaresetforaproduct
lineslifeduringthedevelopmentstage.Costsaremuchlesssubjecttoinfluence
inlaterstagesofthelifecycle.
6.
Kaizen costing is an approach to identify ways to incrementally improve

production efficiency and reduce the costs of making a product. A major
distinction between kaizen costing and target costing is seen in the lifecycle
stagesinwhicheachisused.Kaizencostingisusedtoreducethecostofproducts
inlaterstagesoftheproductlifecycle.Targetcostingisappliedintheproduct
development/designstage.
7.
TheprimarygoalsoftheJITphilosophyare
eliminatinganyprocessthatdoesnotaddvaluetotheproduct;
continuouslyimprovingproductionefficiency;and
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accessible website, in whole or in part.
238
Chapter 18
reducingtotalproductioncostratherthanmerelythecostofpurchasing.
JITattemptstoachievethesegoalsbyworkingto
eliminatetheacquisition/productionofinventoriesinexcessofcurrentneeds;
reducelead/setuptimes;and
minimizeproductdefects.
8.
The following changes are needed to effectively implement JIT in a

productionenvironment:
Thevendorselectionprocessshouldreflectthefollowingconcernsinaddition
totheinvoiceprices:
consistentqualityofmaterials/partstominimizeproductdefects;
reliabledeliveryscheduleswithshortleadtimestoallowformaintaining
littleornoinventoryandforflexibilityandspeedinsettingupproduction
runs;
maintenanceoflongtermrelationshipswithfewervendorstoimprove
communications,ensurequalityandservice,obtainquantitydiscounts,
andreduceoperatingcosts;
nearnesstoplantlocationtoreduceleadtimesandshippingcosts.
Smallquantitiesshouldbeorderedtominimizeinventorycarryingcosts.
Productcomponentsandtoolsshouldbestandardizedtolowercostsand
increaseproductionefficiency.
The number of product components should be minimized to lower
costsandincreaseproductionefficiency.
Productsshouldbecarefullydesignedtoreducesubsequentchangeorders.
Setuptimesshouldbeshortenedtoallowforquicker,moreflexibleproduction.
Productionworkersareusedtocontinuallyensurequalitycontroltoreduce
costsandapproachzerodefects.
Theplantlayoutshouldbedesignedinamannerthatisconducivetotheflow
ofgoodsandorganizationofworkerstominimizecycletimefrommaterial
inputtofinishedproduct.
Employee suggestions for improving production should be sought; these
individualsoftenhaveawealthofinformationthatgoesuntapped.
Multiprocesshandlingshouldbeusedtoimproveworkerflexibilityandinterest.
9.
InanFMS,eachemployeeischargedwithoperatingoroverseeingseveral
machines. Although the automation requires fewer workers than traditional
productionsystems,FMSrequiresitsworkerstohavemoretrainingthanthosein
atraditionalenvironment.Also,employeesneedtobegiventheauthorityand
responsibilitytomakedecisionsbecausetheenvironmentistoofastpacedfor
peopleoffthefloortomakecertainproductiondecisions.
10.
Thetheoryofconstraintsstatesthatproductioncannottakeplaceatarate
fasterthantheslowestmachineorpersonintheprocess.TOCcanbeusedin
Chapter 18
eitheramanufacturingorservicefirmtofocusmanagementsattentiononthe
elimination ofthebottlenecks sothatthebestuseofexistingcapacitycanbe
made.
11.
Totalorderingcostdeclinesasordersizeincreases.Carryingcostsincrease,in
total,asordersizeincreases.Atsomepointthetwocostsareequal,anditisatthis
pointthat theEOQpointis located. Foramounts greater thantheEOQ,total
carryingcostsexceedtotalorderingcosts.
12.
Paretoinventoryanalysisrequiresthatallinventoryitemsbeplacedintoone
ofthreeclasses:A,B,orC.Thethreecategoriesaredistinguishedfromeachother
bytheircosttovolumeratio.Highvalue,lowvolumeitemsareplacedintheA
category;attheotherextreme,lowvalue,highvolumeitemsareplacedintheC
category.AllotheritemsareplacedincategoryB.Aredlinesystemoratwobin
systemisfrequentlyusedtocontrolinventorylevelsofCitems.
239
240
Chapter 18
EXERCISES
13.a. Eachstudentwillhaveadifferentanswer.Nosolutionprovided.
b.
Eachstudentwillhaveadifferentanswer.Nosolutionprovided.
c.
Themagnitudeofinventoryasapercentageoftotalassetswillsuggest
that inventory management is very important to the success of manufacturing
firms.
14. a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
O
O
O
N/A(Purch.)
N
O
N/A(Purch.)
C
O
O
N
C
N/A(Purch.)
C
C
C
N
C
15. a.Astechnologychanges,therelativecostsoforderingandcarryinginventory
change.Thechangesmentionedinthisscenariowouldappeartolowerthecosts
oforderinginventory.Consequently,assumingthecostsofcarryinginventory
remainattheiroriginallevel,thereductioninorderingcostswoulddrivethe
EOQquantitydown.
b. Eachstudentwillhaveadifferentanswer,butthememoshouldmakethepoints
listedin(a).
16. The president should ask for a formal analysis of the situation. This analysis
shouldaddressthecostsandbenefitsofeachalternative.Costsshouldinclude
purchaseprices,warehousingcosts(includinginsurance),personneltooperatethe
warehouseandreceiveanynecessaryinventoriesduringtheperiod,thecostof
capitalonthefundstiedupintheparts,andpenaltiesforcanceling.Thesupply
directorshouldcomplywiththepresidentsrequestbypreparingandpresenting
anobjectivereport.
Often,whenconfrontedbysituations suchasthisone,theonlycoststhatare
consideredarethedirectcosts(purchasepriceandpenalties).Decisionmakingof
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241
thisnatureshouldbecarefultoreflectnotonlythedirectlyvisiblecostsbutalso
thehiddencostsofpurchasearrangements.
17. a.Restaurantsthatmanagetheirfoodproductiononapushbasisanticipatethe
level of demand and prepare food before customers arrive and order.
Restaurantsthatmanagetheirfoodproductiononapullbasisdonotproduce
anyfooduntilthecustomerorders.
b. Customersmayprefertodineatarestaurantthatmanagesfoodproductionona
pushbasis if they are time constrained. Because the food has already been
producedbeforethecustomerarrives,thefoodcanbeservedveryquickly.An
illustrationwouldbearestaurantthatprovidesabuffet.
c. Ifqualityandfreshnessareimportanttothecustomer,foodpreparedonapull
basiswillbepreferredbythecustomer.Also,ifacustomerwantsfoodprepared
tomeetadietaryrestriction,e.g.,nosalt,thecustomerwillpreferthatthefood
productionbepullbased.
18. Eachstudentwillhaveadifferentanswer.However,thereportsshouldaddressthe
followingpoints.Therearesituations inwhichJITwillnotreadilywork.For
example,ifvendorsareunwillingtodeliverinputsonaJITbasis,adoptingJITis
not possible. Also, some products (such as those that are not available from
repetitivemanufacturingprocesses)arenotsuitableforJIT.Forexample,bridges,
officebuildings,andotheroneofftypesofproductsarenotsuitablecandidates
for JIT manufacturing. Other instances in which JIT is not suitable include
productionenvironmentsinwhichdemandisveryseasonal.Insuchenvironments,
itmaybemoreeconomicaltoproduceatabalancedlevelonayeararoundbasis
ratherthanproduceonlyseasonally.
19. Eachstudentwillhaveadifferentanswer;however,theessenceoftherebuttal
wouldbethatprofitabilityoftheproductrecentlyintroducedby3Gwouldvary
withtheproductlifecycle.Further,becausetheproductssalesvolumeislikelyto
belowintheyearofintroduction,firstyearlossesarenotunexpected.Oneshould
arguethattheproductshouldbedroppedonlyifthetotalfuturelifecyclesalesare
expectedtoproducealossratherthanaprofit.
20. Gilesiscorrect.Relativetoproductswithlonglifecycles,thereislessopportunity
to make postdevelopment changes to production processes for products with
shortlifecyclestoimproveprofitability.Ingeneral,thelongerthelifecycle,the
moreopportunitythereistousekaizencostingtechniquestoimproveefficiency.
Forproductswithshortlifecycles,thebulkoflifecyclessaleswillquicklybein
thepastratherthaninthefuture.
21. Lifecyclerevenue:
Year1
48,000$19
Year2
48,000$20
$912,000
960,000
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Year3
90,000$16
Year4
40,000$12
Total
226,000
Requiredprofit226,000$3.50
Selling&Administrativeexpenses
Totaltargetcost
1,440,000
480,000
$3,792,000
(791,000)
(200,000)
$2,801,000
Targetcostperunit:$2,801,000226,000=$12.39
22. a.Lifecyclerevenues:
Year1 4,000$800
Year2 3,600$800
Year3 4,700$800
Year4 5,000$800
Year5 1,500$650
Year6
1,000$650
Totals 19,800
Variablesellingcosts(19,800$140)
Fixedsellingandadministrative
Requiredprofit($15,465,0000.15)
Totaltargetmanufacturingcost
Dividedbynumberofunits
Targetmanufacturingcostperunit
$3,200,000
2,880,000
3,760,000
4,000,000
975,000
650,000
$15,465,000
(2,772,000)
(3,700,000)
(2,319,750)
$6,673,250
19,800
$337.03
b.Totaltargetmanufacturingcost
Year1mfg.cost(4,000$430)
Totaltargetmanufacturingcost
$6,673,250
(1,720,000)
$4,953,250
Targetunitmfg.cost($4,953,25015,800) $313.50
c.
Thecompanysengineerscouldredesigntheproductto
makeitlesscostlytoproducebyreducingbothmaterialandconversioncosts,
orredesigntheprocesstoreduceconversioncosts.Also,theycouldusekaizen
costingtechniques,whichcouldlowercostsafterproductionhasstarted.
23.
The students memo should address the

followingissues:
Targetcost=$145$15=$130.
a.
Giventhatthetargetcostis$130andtheanticipated
actualfirstyearexpectedcostis$140,itisapparentthatitwillbeimpossibleto
realizetherequiredprofitof$15perunitunlesschangesaremade.
b.
There are two major courses of action. First,

managementshouldasktheproductengineers toreviewproductdesignand
specifications withthepurposeofreducingexpectedaveragetotallifecycle
cost to the required $130 target cost. Failing success in this endeavor,
management could consider launching the product with the objective of
Chapter 18
243
achieving longterm cost reductions through kaizen costing techniques. If

managementispessimisticaboutthecompanysabilitytoachievetherequired
longtermreductionsincost,theplansfortheproductshouldbeabandoned.
24.
Each studentwillhaveadifferent answer.No

solutionprovided.
25.a.(1)DirectMaterialInventory
AccountsPayable
32,000
(2)ConversionCostControl
Variousaccounts
64,000
32,000
64,000
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Chapter 18
(3)WorkinProcessInventory
DirectMaterialInventory
ConversionCostControl
FinishedGoodsInventory
WorkinProcessInventory
(4)AccountsReceivable
Sales
CostofGoodsSold
a.
(1)CostofGoodsSold
Variousaccounts
96,000
96,000
32,000
64,000
96,000
158,000
158,000
94,800
94,800
96,000
96,000
(2)Noentry
(3)FinishedGoodsInventory
CostofGoodsSold
1,200
26.a.RawandInProcessInventory
AccountsPayable
302,000
Variousaccounts
608,000
RawandInProcessInventory
600,000
900,000
CostofGoodsSold
894,000
CostofGoodsSold
AccountsReceivable
Sales
1,200
302,000
608,000
600,000
900,000
894,000
8,000
8,000
1,490,000
1,490,000
Alternatively,thefollowingjournalentriescouldbeused:
CostofGoodsSold
AccountsPayable
AccountsReceivable
Sales
2,000
6,000
902,000
302,000
608,000
1,490,000
1,490,000
Chapter 18
245
b.
RawandInProcess
302,000
900,000
600,000
Bal.
2,000
CostofGoodsSold
894,000
8,000
Bal.902,000
AccountsPayable
302,000
Sales
1,490,000
c.
FinishedGoods
900,000
894,000
Bal.6,000
608,000
600,000
8,000
Bal.0
Variousaccounts
608,000
AccountsReceivable
1,490,000
TheremainingbalanceinRawandInProcessInventory
$902,000$900,000=$2,000
TheremainingbalanceinFinishedGoodsInventory=
($2+$4)1,000=$6,000
27.a.Materialusagevariance:
Actualcostofmaterialthismonth:
(A)11,000lbs.$2.50perlb.=
(B)10,000lbs.$3.40perlb.=
Currentmaterialstandard:
(A)3,0002$2.50perlb.=
(B)3,0005$3.40perlb.=
Materialusagevariance
Annualmaterialstandard:
(A)3,0003$2.50perlb.=
(B)3,0004$3.40perlb.=
Currentstandard
ECOvariance
b.
$27,500
34,000
$15,000
51,000
$22,500
40,800
$61,500
66,000
$4,500F
$63,300
(66,000)
$2,700U
Theeffectoftheengineeringchangewastochangethe
mix of material inputs by decreasing the proportion of the less expensive
material,A.ForJuly,thisengineeringchangegeneratedextracostsof$2,700.
28.a.
SPAQ
SPSQ
$4,400
(X)$0.02220,000=
(X)$0.02216,000= $4,320
(Y)$0.0531,000= 1,550
(Y)$0.0532,000= 1,600
$5,950
$5,920
$30U
246
Chapter 18
MaterialUsageVariance
(MaterialX,$80U;MaterialY,$50F)
Chapter 18
247
b.CurrentSPSQ
(X)$0.02216,000= $4,320
(Y)$0.0532,000= 1,600
$5,920
AnnualSPSQ
$5,120
(X)$0.02256,000=
(Y)$0.0516,000= 800
$5,920
$0
ECOVariance
(MaterialX,$800F;MaterialY,$800U)
c. Thecompanywasfairlyeffectiveinmanagingcosts.Theengineeringchange
variancehadnoeffectoncosts,butrelativetothecurrentstandard,actualusage
slightlyexceededthestandard.
d.
29.
The company would make a change that was cost

neutralifthequalityoftheproductwouldbeimproved.Thus,fornoincreasein
cost, a higher quality product is obtained, which could result in greater
revenues.
JIT requires close relations and communications with suppliers.

Preferably,thereshouldbeafew,wellcultivatedsupplierswhoaretrainedto
knowpreciselythecompanysinventoryneedsandwhounderstandthecritical
requirementofmeetingtheJIToperationschedule.Further,thesuppliersshould
bemadeawarethattheywillbedismissedfordefectiveorinappropriateproducts
or service or for failure to meet delivery schedules. All of the above require
continualclosecommunicationsbetweenthesupplierandtheJITproducer.
In this case, Duggan Mfg. needs to consider whether some or all of the
responsibility rests with the company itself. Have the suppliers been properly
trained and made precisely aware of product and timing needs? Have the
suppliers been chosen with the expertise, facilities, and delivery capability to
serviceDuggansrequirements?DoDugganspersonnelknowexactlywhatthe
needsare,andarethoseneedsfairlystable?If,forexample,Dugganhasfrequent
engineering changes because of inadequate product development, supplier
complianceishampered.
Finally,JITsystemscannotbefullyandeffectivelyimplementedinafewmonths.
Itusuallytakesconsiderablylongertomakethesystemworkwell.Expectations
thatJITcanhaveimmediateperfectresultsarelikelytoleadtodisappointment.
30. Eachstudentwillhaveadifferentanswer.Nosolutionprovided.
31. a.AdoptionofaFMSshouldreducerawmaterial,workinprocess,andfinished
goods inventories. Because an FMS allows the manufacturer to switch
production among products quickly, production runs canbeshorter. Shorter
production runs support lower levels of finished goods and work in process
inventories.Inturn,shorterproductionrunsallowlowerlevelsofmaterialstobe
maintained.
248
32.
Chapter 18
b.
TheFMSshouldallowproductionemploymentlevels
todrop.WithanFMS,mostproductionactivitiesareperformedbymachine
andfewerproductionemployeesareneededtooperate/monitorthemachines.
Also,theproductionlayoutforatypicalFMSallowsoneemployeetooperate
multiplemachines.Accordingly,relativetoatraditionalproductionsystem,an
FMSshouldrequirealowernumberofproductionemployees.
c.
Inatraditionalproductionsystem,employeestypically
performmanualconversionoperationsoroperateasinglemachine.InanFMS,
machinesarecomputercontrolled,andoneemployeetypicallyoperatesseveral
machines. Thus, how machines are operated and the number of machines
operatedbyasingleemployeediffersignificantlybetweentraditionalandFMS
production.Accordingly,existingemployeeswouldneedsubstantialtrainingto
functioninanFMSenvironment.
Thefirstconsiderationwouldbetokeepthetworemainingpolishing
machinesoperatingatpeakefficiency.Todosowouldrequirethatallflatware
enteringthepolishingoperationbedefectfree.Thus,onewouldwanttobecertain
that there is a quality inspection that immediately precedes the polishing
operation. Further, one would want to recommend that the two remaining
machines be properly maintained sothat noadditional breakdowns will occur
whilethethirdmachineisbeingrepaired.
Togainadditionalcapacity,onecouldrentamachinefromavendor,oroutsource
someofthepolishingtoanoutsidefirm.
33.
No,PromotionalProductsdidnotcompletethe180unitsby5:00P.M.
TIMEOFAFTERNOON
12
23
34
45
Dept.1output
40
44
50
46
Dept.2output
40
44
45
45
Dept.2backlog
0
0
5
1
Cumulative
Dept.2
backlog
0
0
5
6
Total
180
174
6*
*Therobotcanbecountedontofinish45unitsperhour.
AlthoughDept.1averaged45unitsperhour,itwaslategettingsixunitstoDept.2in
thelasttwohours.Sincetherobotwasconstrainedto45unitsperhour,itcould
nothandletheextrafiveunitsgivenitbetween3:00and4:00andtheextraone
unitgivenitbetween4:00and5:00.
34. $16,700;attheEOQ,thetotalannualcarryingcostswillequalthetotalannual
orderingcosts.That is, the EOQ model minimizes the sum of ordering and carrying
costs and the minimum cost occurs where total ordering costs and total carrying
costs are equal.
Chapter 18
35. Storage
Handling
Insurance
Opportunitycost($6.800.08)
Carryingcost
249
$0.240
0.280
0.440
0.544
$1.504
(Productionlaborcostisomitted.)
36. EOQ(Facecream)=(2QOC)
=[(22,00012.00)2.00]
=(24,000)
=155(rounded)
EOQ(Lotion)=[21,00040)1.45]
=(55,172)
=235(rounded)
EOQ(Powder)=[(290015)1.25]
=(21,600)
=147(rounded)
37. EOQ=(2QOC)
(EOQ)2=2QOC
2
(CEOQ )(2O)=Q
Q=[0.35(1,600)2](2140)
=896,000280
=3,200units
38. EPR=(2QSC)
=[(23,600600)2]
=(2,160,000)
=1,470units(rounded)
39. a.EPR=[(215,000400)2.50]
=(4,800,000)
=2,191units(rounded)
Avg.inventory=2,1912=1,095.5units
Numberofordersperyear=15,0002,191=7(rounded)
Carryingcost(1,095.5$2.50)
$2,738.75
Setupcost(7$400)2,800.00
Totalcost
$5,538.75
b. EPR=[(215,000100)10]
=(300,000)
=548units(rounded)
Avg.inventory=5482=274units(rounded)
Numberofordersperyear=15,000548=28(rounded)
Carryingcost(274$10)
$2,740
250
Chapter 18
Setupcost(28$100)2,800
Totalcost
$5,540
Chapter 18
251
PROBLEMS
40. a.Becauseitispresumablylesscostlytoproduceporkandeggsusingtraditional
methods,thecosttoproducetheporkandeggsislikelytobehigherusingthe
morehumanemethods.Assumingthesuppliersareabletopasstheirhigher
costsontoBurgerKing,thepricesBurgerKingpaysforeggsandporkwill
increase.
b. TheBurgerKingpolicyislikelytobesupportedbysomeBurgerKingpatrons
andopposedbyothers.Thosewhosupportthepolicyarelikelytobewillingto
payhigherpricesforBurgerKingfood,knowingthatthehigherpricesallow
animalstobetreatedmorehumanely.However,othercustomerswillbecritical
of the higher prices based on the argument that those customers had no
objectiontotheformermethodsofproducingeggsorpork.Suchcustomerswill
arguetheyarepayinghigherpricesforfoodsoBurgerKingcanappeaseanimal
rightsactivists.
c. ThekeyethicalissueistheextenttowhichBurgerKingimposesunreimbursed
costsonitssuppliersbecauseofitsnewpolicy.Itisethicallyquestionablefor
Burger King to demand that its existing suppliers absorb all of the costs
associated with the more humane methods of producing pork and eggs.
Alternatively,amoreethicalimplementationofthenewpolicywouldrequire
that Burger King reimburse a significant portion of the additional costs of
complyingwithitsnewsupplierstandards.
41. a.Akeyconsiderationwouldbetominimizetheprobabilityofhavingobsolete
products and product components on hand. With the rapid rate of product
obsolescence, the firm would only want to produce to satisfy immediate
demand; no stockpiling would occur. Also, the firm would want to have a
production systemthat couldbequickly adapted fromtheproduction ofone
producttoanother.
b. The firm would want to use a pullbased inventory control system. Such a
systemwouldavoidtheaccumulationofmaterialsandcomponentsthatmight
berenderedobsoleteorunusableduetotechnicalinnovationswithinthefirm
andbycompetitors.
c. It would have the effect of reducing the EPR. The EPR would be reduced
becauseofthehighcarryingcostofinventory.Inventorycarryingcostswould
behighbecauseincludedintheinventorycarryingcostswouldbeacomponent
toaccountforthecostofproductobsolescence.
(CMAadapted)
42. a.Thecontrollerwouldwanttoisolatejustthevariablecoststhosecoststhat
varywiththenumberofordersprocessed.Inthiscase,therelevantcostswould
includethe$0.90ofdepartmentsuppliesand$6.06forphoneexpense.
252
Chapter 18
b. Similartotheorderingcosts,thecontrollerwouldonlywanttoincludethose
coststhatvarywiththenumberofunitsstored.Thevariablecostsinclude$0.15
forinventoryinsuranceand$0.16forobsolescence.
Chapter 18
43.
a.Thecompanyproducesonlytwoproducts,sotheproductionsettingislikely
to
berelativelysimple.Becauseasignificantportionofitssalesareseasonal,the
companymaychoosetouseatraditionalpushsystem.Usingapushsystem,the
company could level production volume throughout the year. Alternatively,
withapullsystem,thefirmwouldproduceatlowvolumesduringpartofthe
yearandveryhighvolumesduringpartoftheyear.Itwouldbeverydifficultto
maintain levelemployment andfull employment oftheproduction facilities
usingapullsystem.
b. The significant variety of products produced along with the high unit costs
argues for a pull system. Using a traditional push system, to accommodate
significant product variety, the firm would have to carry large inventories.
Because unit costs are high, the carrying costs would also be high.
Alternatively,withapullsystem,unitscouldbeproducedinsmalllots,which
would facilitate maintenance of low inventories and low carrying costs of
inventories.
c. Becausetheproductshaveashortlifecycle,thereissignificantriskassociated
withcarryinglargeinventories;therefore,thefirmwouldprefernottousea
pushsystemthattendstorequirehigherinventorylevelsthanapullsystem.A
pullsystemwouldallowthefirmtomaintainlowinventorieswhilemeeting
salesdemand.
d. Firmsseektoavoidtheriskofcarryinglargestocksofproductssubjectto
obsolescence,spoilage,orotherriskfactors.Apullsystemallowsfirmstomeet
demandwhilemaintainingsmallerinventorylevels;accordingly,apullsystem
wouldbepreferredinthiscase.
e. Because the products have long life cycles, the risk of maintaining larger
inventoriesisminimal.Also,becausetheproductmixislimited,thereareonly
smallgainsavailabletothequicksetupsandshortproductionrunsavailable
withapullsystem.Inthiscase,theproductionefficienciesassociatedwiththe
longproductionrunscharacteristicofapushsystemarelikelytooutweighthe
risksandcostsofcarryingtheassociatedhigherinventorylevels.
44. a. Successfully usingJITtomanage inventory requires that afirm beable to

quicklyproducethequantityandmixofproductsorderedbyits customers.
However,thisbecomesmoredifficultasdistancegrowsbetweenthefirmand
itssuppliersoritscustomers.Thelogisticalchallengesofmovingcomponent
partsorfinishedgoodsthousandsofmilesisdaunting.
b. Becauseofthedifficultyofpredictingtheproductmix,Kosswasforcedto
maintainexcessiveinventoriesofcomponentparts(theseinventorieswerenot
managedonaJITbasis).Alternatively,bymaintainingareasonablelevelof
finishedgoods,Kosswasabletodramaticallyreduceinventoriesofcomponent
parts.
253
254
Chapter 18
c. Astockoutageofacomponentpartcreatesaproblemwithalongerleadtimeto
asolution.Intheeventofafinishedgoodsoutage,theleadtimeincludesonly
thetime tomanufacture anotherunitofproduct.However,inthecaseofa
component stockout that results in a finished goods stockout, the lead time
includesthemanufacturingtimeplusthetimetoorder,ship,andreceivethe
requiredcomponent.Thus,whileKosswasmanagingfinishedgoodsonaJIT
basis,thefirmmaintainedexcessiveinventoriesofcomponentpartstoavoida
stockout that would have a potentially long lead time for a solution. Koss
decided this approach was inferior to the alternative of holding a modest
inventoryoffinishedgoodsthatcouldbereplenishedfromamodeststockof
componentparts.
45. a.Because the new product is described as innovative, the CFO would be
concernedaboutanintroductorypricethatislowerthanthelifecycleaverage
price.Intheusualcircumstance,thehighestpriceofthelifecyclewouldoccur
atthetimetheproductisintroducedbecausetheproductwillbeperceivedby
themarkettobemoredifferentfromcompetingproductsatthattimerelative
to later in the product life cycle. Thus, the CFOs expectation is that the
introductorypriceshouldbesignificantlyhigherthan$60.
b. Thisisasignificantfactorandwouldinfluenceapricerecommendation.Ifthe
priceissethigh,volumeofsaleswillsuffer.Ifthepriceissettoolow,volume
willincrease,butunitcontributionmarginwillbesacrificed.Thegoalistoseta
pricethatmaximizeslifecyclecontributionmargin.
c. Becausetheprofitonelectronicproductstendstobehighestintheearlyyears
ofthelifecycle,itwouldbepreferabletorealizeasmuchlifecyclevolumeas
earlyaspossible.Accordingly,thefactthatYears3and4accountformorelife
cyclevolumethanYears1and2wouldcausetheCFOconcern.
46. a. Yes. The royalties realized from game sales will vary with the number of
PlayStationssold.Thus,ifthevolumeofPlayStationsalesissensitivetoprice,
alowerpriceshouldresultinthesaleofmoreunitsandmoregamesaswell.
b.
Settingthepriceat$599shouldresultinsignificantlymoresalesearly
intheproductlifecycleaswellasforthetotallifecycle.Thelowersalesprice
willmaketheproductmoreattractiverelativetocompetitors,whichwillnot
onlyincreaseunitsalesbutmayevendiscouragecompetitorsfromlaunching
productsthataredirectcompetitors ofthePlayStationbecauseofthelosses
thosefirmswouldlikelysustainintryingtomatchSonysprice.
c.
The practice is more beneficial ifthe product life cycle is long. A

longerlifecyclewouldallowSonytopractice kaizencostingtechniques to
reducethecostofproductionrelativetothesalesprice.Also,alongerlifecycle
wouldallowthefirmtoearnmoreroyaltiesonthesaleofsoftware.
Chapter 18
47. a.Revenues
Year1
Year2
Year3
Year4
Year5
Year6
Year7
Year8
Totals
Profitmargin
Targetcost
255
100,000$2.50
250,000$2.40
350,000$2.30
500,000$2.10
600,000$2.00
450,000$2.00
200,000$1.90
130,000$1.90
2,580,000
$250,000
600,000
805,000
1,050,000
1,200,000
900,000
380,000
247,000
$5,432,000
(1,358,000)
$4,074,000
Unittargetcost$4,074,0002,580,000=$1.58
b.Totalproductioncostestimate:
Fixedcosts($200,0008)
Variablecosts($2.602,580,000)
Total
$1,600,000
6,708,000
$8,308,000
Thecomparisonoftheestimatedproductioncoststothetargetproductioncost
isveryunfavorable.Notethattheexpected,actualvariablecostssubstantially
exceedthetargetcost.Hence,itishighlylikelythatthecompanywillneedto
redesigntheproducttobringactualcostintoalignmentwiththetargetcost.
Kaizenmethodsalonecannotfeasiblyclosethecostgap.
c.
48.
Because the target and expected costs are far apart, the company
should strongly consider deferring production until the product can be
redesignedtoreduceexpectedproductioncosts.
Usingthedatagiven,thetargetcostofproductioncanbecomputed:
Estimatedsalesprice
$215
Projectedprofitperunit
(35)
Projectedselling&administrativecosts
(40)
Targetcostofproduction
$140
Estimatedcostofproduction:
Directmaterial
$70
Directlabor
40
Variableoverhead
15
10
Fixedcosts[($360,0005)180,000]
Totalestimatedactualcost
$135
Afterintegratingthemarketingandengineeringinformation,itisclearthatthe
prospectsarefavorableforlaunchingaproductthatwillgeneratemorethanthe
expectedlevelofgrossmargin.Theexpectedcostofproductionisslightlybelow
thetargetcostofproduction.Thegapbetweenthetwonumbersshouldrepresent
additionalprofit.
256
Chapter 18
49. a.D
b. U
c. T
d. D,T
e. T
f. T
g. D
h. T
i. T
j. D,T
50.a.ConversionCostControl
Variousaccounts
AccountsPayable
AccountsReceivable
Sales
b.
40,000
64,000
116,000
CostofGoodsSold
62,000
AccountsPayable
24,000
Variousaccounts
40,000
CostofGoodsSold
62,000
2,000
AccountsReceivable
Sales
c. CostofGoodsSold
AccountsPayable
Variousaccounts
AccountsReceivable
Sales
d.
40,000
24,000
40,000
116,000
62,000
24,000
40,000
24,000
40,000
116,000
116,000
62,000
2,000
24,000
40,000
116,000
116,000
Variousaccounts
40,000
CostofGoodsSold
64,000
40,000
Chapter 18
257
AccountsPayable
24,000
40,000
CostofGoodsSold
2,000
AccountsReceivable
Sales
2,000
116,000
116,000
51.a.(1)RawandInProcessInventory
MaterialPriceVariance
AccountsPayable
24,904,000
480
AccumulatedDepreciation
Cash
AccountsPayable
3,000,000
(3)RawandInProcessInventory
(20,800$140)
2,912,000
24,904,480
600,000
2,200,000
200,000
2,912,000
(4)Noentry
AccumulatedDepreciation
Cash
AccountsPayable
14,442,000
(6)RawandInProcessInventory
(103,200$140)
14,448,000
4,000,000
9,325,000
1,117,000
14,448,000
b. 103,200rolls0.4=41,280yds.;41,280$2=$82,560increase
c. MaterialQuantityEngineeringChangeVariance
82,560
82,560
d. 103,200(5240)$140=$301,000saved
e. ConversionCostControl
301,000
MachineHrs.Eng.ChangeVariance 301,000
f. Actualconversioncost($3,000,000+$14,442,000)
Machinehoursengineeringchange
Revisedconversioncost
Appliedconversioncost($2,912,000+$14,448,000)
Underapplied
$17,442,000
301,000
$17,743,000
(17,360,000)
$383,000
g. Increaseinmaterialcostperroll(0.4$2)
Decreaseinconversioncostperroll[(560)$35]
$0.80
(2.92)
258
Chapter 18
Netdecreaseincostperroll
$(2.12)
Yes,thechangesarecostbeneficial.
52. a.Whetherthisisanethicalpracticedependsontherationalefortheoilandgas
industrytoadoptJIT.AssumingtheindustryhasmigratedtoJITbecauseJIT
reduces longrun costs of producing petroleum products, there is no ethical
issue.Alternatively, iftheindustryhasembraced JITbecauseJITmandates
lean inventories, and in turn, lean inventories, allow the industry to exploit
supplychainshocks(e.g.,hurricanes),byincreasingprices,thenthepracticeis
ethicallyquestionable.
b. Thetheoryofconstraintsfocusesmanagerialattentiononmaximizingthereturn
afirmrealizesonaconstrainedresource.Ifoilandgasproductsaretreatedas
theconstrainedresource,managementwouldfocusonfindingwaystogenerate
themaximumoutputfromthesupplyofoilandgasinputsavailable.
c. Firmsthatareheavilydependentonoilandgasinputscoulddoanyofthe
following:
(1) developalternativeandmultiplesourcesofsupply;
(2) developforwardcontractsforrequiredsuppliesofoilandgasproducts;
(3) diversifyoutputssothatsomeoutputsarelessenergyintensive;or
(4) acquirealternativeenergysourcessuchaswind,solar,andethanol.
d. Itiscertainlytruethat(collectively)theU.S.governmentmakesmoreprofitper
gallonofgasolinesoldthandotheoilandgascompanies.Assumingagastaxis
anethicalsourceofgovernmentsupport,itcanbearguedthatthisisanethical
tax because those who use the most energy (and are contributing most
significantlytoenergyshortages)bearthegreatesttax.Further,thehigherthe
taxrate,thegreateristhenegativeimpactondemandforenergyandthelower
is energy consumption. One could argue that the tax would be made more
ethicalifthosewhoareatthegreatestdisadvantagebecauseofhighenergy
prices(e.g.,poorandelderly)receivedenergycostsubsidiesfromtheenergy
taxescollectedbygovernment.
53. a.EOQ=[(27,00032.00)0.50]
=(896,000)
=947pounds(rounded)
b. Averagedailyusage=7,000365=19.18lbs.
Orderpoint=[19.18(12+7)]=364lbs.(rounded)
54. a.EPR=(2QSC)
=[(230,000$50)$0.25]
=(12,000,000)
=3,464pounds(rounded)
b.
Numberofruns=30,0003,464=9runs(rounded)
c.
EOQ(seed)=(2QOC)
Chapter 18
259
=[(230,00022$4.25)$0.01]
=(102,000,000)
=10,100seeds(rounded)
EOQ(fertilizer)=[(230,0000.25$8.80)$0.05]
=(2,640,000)
=1,625poundsoffertilizer(rounded)
d. Seedorders=(30,00022)10,100=12orders(rounded)
Fertilizerorders=(30,0000.25)1,625=5orders(rounded)
e. Totalcost:
Averageinventory:
Onions: 3,4642=1,732lbs.
Seeds:
10,1002=5,050seeds
Fertilizer: 1,6252=812.5lbs.
Carryingcosts:
Onions: 1,732$0.25
Seeds:
5,050$0.01
Fertilizer: 812.50$0.05
Orderingcosts:
Seeds: 12$4.25
Fertilizer: 5$8.80
Setupcosts:
Onions: 9$50.00
Totalcost
$433.00
50.50
40.63
$524.13
$51.00
44.00
95.00
450.00
$1,069.13
f.
Thegrowingofonionsisverysimilarinmostrespectstoa
factoryproductionsetting.However,thelengthoftimefromthebeginningof
theprocesstotheendoftheprocessislikelytobemuchlongerandtherefore
requires more careful planning. An incorrect estimate of demand cannot be
remediedinanytimeshorterthanthegrowingcycleoftheonionplant.Also,
weather and local growing conditions may be additional constraints on the
productiondecision.Further,theyieldislikelytovarymuchmoreforonions
thanotherproductionprocessesbecausesomeofthecriticalinputsarebeyond
thecontrolofmanagers(sunshineandrain,forexample).
g.
Yes,therearesomeinconsistencies.Becausethegrowingof
onionsisacyclicalevent,asopposedtoacontinuousevent,thereshouldbea
verycloserelationshipbetweentherequiredquantitiesofonions,fertilizer,and
seeds.Inventoriesshouldbeminimalandbeorderedinquantitiesthatmatch
inputrequirementsforeachgrowingcycle.TheEOQquantitiesdifferfromthe
cyclequantities.

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Chapter 18

Target costing is a method of determining an allowable cost of making a

Kaizen costing is an approach to identify ways to incrementally improve

The following changes are needed to effectively implement JIT in a

The students memo should address the

There are two major courses of action. First,

achieving longterm cost reductions through kaizen costing techniques. If

Each studentwillhaveadifferent answer.No

The company would make a change that was cost

JIT requires close relations and communications with suppliers.

44. a. Successfully usingJITtomanage inventory requires that afirm beable to

The practice is more beneficial ifthe product life cycle is long. A

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