EXERCISE 5-33 (30 MINUTES)

1. ZODIAC MODEL ROCKETRY COMPANY

COMPUTATION OF SELLING COSTS
BY ORDER SIZE AND PER MOTOR WITHIN EACH ORDER SIZE
Order Size
Small Medium Large Total
a
Sales commissions
(Unit cost: $675,000/225,000
$    6,000 $135,000 $534,000 $   675,000
= $3.00 per box)...........................................
box)................................................................

Catalogs b
(Unit cost: $295,400/590,800
127,150 105,650 62,600 295,400
= $.50 per catalog).......................................
catalog)..........................................................

Costs of catalog sales c

(Unit cost: $105,000/175,000
47,400 31,200 26,400 105,000
= $.60 per motor)..........................................
skein).............................................................

Credit and collection d

(Unit cost: $60,000/6,000
   4,850   24,150
= $10.00 per order).......................................   31,000    60,000
order).............................................................

Total cost for all orders of a

given size...........................................................
$185,400 $296,000 $654,000 $1,135,400

Units (motors) sold e............................................

103,000 592,000 2,180,000

Unit cost per order of a given

size f...................................................................
$1.80 $.50 $.30

a
Retail sales in boxesunit cost:
Small, 2,000$3
Medium, 45,000$3
Large, 178,000$3

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Managerial Accounting, 8/e 5-1
 b
Catalogs distributedunit cost
c
Catalog salesunit cost
d
Number of retail ordersunit cost
e
Small: (2,00012) + 79,000 = 103,000
Medium: (45,00012) + 52,000 = 592,000
Large: (178,00012) + 44,000 = 2,180,000
f
Total cost for all orders of a given size ÷ units sold

EXERCISE 5-33 (CONTINUED)

2. The analysis of selling costs shows that small orders cost more than large orders.
This fact could persuade management to market large orders more aggressively
and/or offer discounts for them.

EXERCISE 5-40 (40 MINUTES, PLUS TIME AT RESTAURANT)

Several restaurant activities are listed in the following table, along with the required
characteristics for each activity. Many other possibilities could be listed, depending on
the level of detail.

Value-Added
or Non-
Activity Description Value- Activity Trigger Root Cause
Added

Taking reservations VA Customer calls on Customer desires

phone reservation

Customers waiting NVA Customer arrives, but An error was made in

for a table no table is ready reservation; service is
slow; customers are slow;
customers arrive without
reservations

Seating customers VA Table becomes Customer's reservation (or

available turn in line) comes up;
table becomes ready

Taking orders VA Customers indicate Kitchen staff needs to

readiness to order know what to prepare

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Managerial Accounting, 8/e 5-2
Serving meals to VA Meals are ready Meals are ready;
customers customers are hungry

Returning meal to NVA Customer complains An error was made in

kitchen for revised about meal explaining the menu; there
preparation is an error in the printed
menu description; meal
was prepared wrong;
customer is picky

Customers eating VA Meals are served and Customers are hungry

meal are satisfactory

Clearing the table VA Customers are Customers have finished

finished eating
EXERCISE 5-40 (CONTINUED)

Delivering check to VA Customers are Customers need to know

table finished ordering and amount of bill
eating

Collecting payment VA Customers have Restaurant needs to

produced cash or collect payment for
credit card services rendered

EXERCISE 5-44 (20 MINUTES)

There are many key activities that can be suggested for each business. Some
possibilities are listed below. After each activity, a suggested cost driver is given in
parentheses.

(1) airline: (a) reservations (reservations booked)

(b) baggage handling (pieces of baggage handled)
(c) flight crew operations (air miles flown)
(d) aircraft operations (air miles flown)
(e) in-flight service (number of passengers)

(2) restaurant (a) purchasing (pounds or cost of food purchased)

(b) kitchen operations (meals prepared)
(c) table service (meals served)
(d) table clearing (meals served)

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Managerial Accounting, 8/e 5-3
 (e) dish washing (dishes washed)

(3) fitness club: (a) front desk operations (number of patrons)

(b) membership records (number of records)
(c) personnel (number of employees)
(d) equipment maintenance (maintenance hours)
(e) fitness consultation (hours of service)

(4) bank: (a) teller window operations (number of customers)

(b) loan processing (loan applications)
(c) check processing (checks processed)
(d) personnel (number of employees)
(e) security (number of customers)

hotel: (a) front desk operations (number of guests)

(5)
(b) bell service (pieces of luggage handled)
(c) housekeeping service (number of guest-days)
(d) room service (meals delivered)
(e) telephone service (phone calls made)

(6) hospital: (a) admissions (patients admitted)

(b) diagnostic lab (tests performed)
(c) nursing (nursing hours)
(d) surgery (hours in operating room)
(e) general patient care (patient-days of care)

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Managerial Accounting, 8/e 5-4
solutions to Problems
PROBLEM 5-45 (35 MINUTES)

1. Activity-based costing results in improved costing accuracy for two reasons. First,
companies that use ABC are not limited to a single driver when allocating costs to
products and activities. Not all costs vary with units, and ABC allows users to
select a host of nonunit-level cost drivers. Second, consumption ratios often
differ greatly among activities. No single cost driver will accurately assign costs
for all activities in this situation.

2. Allocation of administrative cost based on billable hours:

E-commerce consulting: 2,400 ÷ 6,000 = 40%; $381,760 x 40% =

$152,704
Information systems: 3,600 ÷ 6,000 = 60%; $381,760 x 60% = $229,056

Information
E-Commerce Systems
Consulting Services
Billings:
3,600 hours x $140………… $504,000
2,400 hours x $140………… $336,000
Less: Professional staff cost:
3,600 hours x $50 (180,000)
2,400 hours x $50 (120,000)
Administrative cost……. (152,704) ( 229,056)
Income…………………………… $ 63,296 $ 94,944

Income ÷ billings………………. 18.84% 18.84%

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Managerial Accounting, 8/e 5-5
PROBLEM 5-45 (CONTINUED)

3. Activity-based application rates:

Activity Application
Activity Cost Driver Rate

Staff support $207,000 ÷ 300 clients = $690 per client

In-house 145,000 ÷ 5,000 computer = $29 per CH

computing hours (CH)

Miscellaneous 29,760 ÷ 1,200 client = $24.80 per CT

office charges transactions
(CT)

Staff support, in-house computing, and miscellaneous office charges of e-

commerce consulting and information systems services:

Information
E-Commerce Systems
Activity Consulting Services

Staff support:
240 clients x $165,600
$690…………...
60 clients x $ 41,400
$690…………….
In-house computing:
2,900 CH x 84,100
$29……………….
2,100 CH x 60,900
$29……………….
Miscellaneous office charges:
480 CT x 11,904
$24.80……………...
720 CT x 17,856
$24.80……………...
Total $120,156 $261,604
……………………………….

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Managerial Accounting, 8/e 5-6
PROBLEM 5-45 (CONTINUED)

Profitability e-commerce consulting and information systems services:

Information
E-Commerce Systems
Consulting Services
Billings:
3,600 hours x $140……….. $504,000
2,400 hours x $140……….. $336,000
Less: Professional staff cost:
3,600 hours x $50 (180,000)
2,400 hours x $50 (120,000)
Administrative cost……. (120,156) ( 261,604)
Income………………………….. $ 95,844 $ 62,396
Income ÷ billings……………... 28.53% 12.38%

4. Yes, his attitude should change. Even though both services are needed and
professionals are paid the same rate, the income percentages show that e-
commerce consulting provides a higher return per sales dollar than information
systems services (28.53% vs. 12.38%). Thus, all other things being equal,
professionals should spend more time with e-commerce.

5. Probably not. Although both services produce an attractive return for Clark and
Shiffer, the firm is experiencing a very tight labor market and will likely have
trouble finding qualified help. In addition, the professional staff is currently
overworked, which would probably limit the services available to new clients.

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Managerial Accounting, 8/e 5-7
PROBLEM 5-46 (60 MINUTES)

1. The predetermined overhead rate is calculated as follows:

Predetermined overhead rate = Budgeted manufacturing overhead/budgeted

direct-labor hours = $1,224,000/102,000* = $12 per hour

*Direct labor, budgeted hours:

REG: 5,000 units  9 hours............................. 45,000 hours
ADV: 4,000 units  11 hours............................ 44,000 hours
SPE: 1,000 units  13 hours............................ 13,000 hours
Total direct-labor hours............................................... 102,000 hours

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Managerial Accounting, 8/e 5-8
PROBLEM 5-46 (CONTINUED)

2. Activity-based-costing analysis:
Cost
Driver
Quantity Activity Product Activity
Cost for Cost for Line Cost per
Activity Cost Driver Pool Product Product Product Prod. Unit of
Activity Cost Pool Driver Quantity Rate Line Line Line Volume Product

Machin $ $27.00
Machine $310,500 e 115,000 2.70 REG 50,000 $135,000 5,000
32.40
Related Hours ADV 48,000 129,600 4,000
GMT 17,000 45,900 1,000 45.90
Total 115,000 $310,500
Material 52,500 Prod. 100 525.00 REG 40 $ 21,000 5,000 4.20
Hand. Runs ADV 40 21,000 4,000 5.25
GMT 20 10,500 1,000 10.50
Total 100 $ 52,500
Purch. 75,000 Purch. 300 250.00 REG 100 $ 25,000 5,000 5.00
Orders ADV 96 24,000 4,000 6.00
GMT 104 26,000 1,000 26.00
Total 300 $ 75,000
Setup 85,000 Prod. 100 850.00 REG 40 $ 34,000 5,000 6.80
Runs ADV 40 34,000 4,000 8.50
GMT 20 17,000 1,000 17.00
Total 100 $ 85,000
Inspect. 27,500 Inspect. 1,100 25.00 REG 400 $ 10,000 5,000 2.00
Hours ADV 400 10,000 4,000 2.50
GMT 300 7,500 1,000 7.50
Total 1,100 $ 27,500
Ship. 66,000 Ship. 1,100 60.00 REG 500 $ 30,000 5,000 6.00
ADV 400 24,000 4,000 6.00
GMT 200 12,000 1,000 12.00
Total 1,100 $ 66,000
Eng. 32,500 Eng. 650 50.00 REG 250 $ 12,500 5,000 2.50
Hours ADV 200 10,000 4,000 2.50
GMT 200 10,000 1,000 10.00
Total 650 $ 32,500
Machin 50.00
Fac. 575,000 e 115,000 5.00 REG 50,000 $250,000 5,000
Hours ADV 48,000 240,000 4,000 60.00
GMT 17,000 85,000 1,000 85.00
Total 115,000 $575,000
Grand Grand $1,224,00
Total $1,224,000 Total 0

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Managerial Accounting, 8/e 5-9
PROBLEM 5-46 (CONTINUED)

3. Calculation of new product costs under ABC.

REG ADV GMT

Direct material........................... $129.00 $151.00 $203.00
Direct labor (not including
set-up time)........................... 171 .00 (9 hr. @ $19) 209 .00 (11 hr. @ 247 .00 (13 hr. @
$19) $19)
Total direct costs per unit........... $300 .00 $360 .00 $450 .00

Manufacturing overhead (based on ABC):

Machine-related.................... $ 27.00 $ 32.40 $ 45.90
Material handling................... 4.20 5.25 10.50
Purchasing............................ 5.00 6.00 26.00
Setup.................................... 6.80 8.50 17.00
Inspection............................. 2.00 2.50 7.50
Packing/shipping................... 6.00 6.00 12.00
Engineering design................ 2.50 2.50 10.00
Facility.................................. 50 .00 60 .00 85 .00
Total ABC overhead
cost per unit.......................... $103 .50 $123 .15 $213 .90
Total product cost per unit.......... $403 .50 $483 .15 $663 .90

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Managerial Accounting, 8/e 5-10
PROBLEM 5-46 (CONTINUED)

4. Comparison of costs and target prices under two alternative product-costing

systems:

REG ADV GMT

Reported unit overhead cost:
Traditional, volume-based costing system $108.00 $132.00 $156.00
.......................................................................
Activity-based costing system 103.50 123.15 213.90
.......................................................................
Reported unit product cost (direct material, direct
labor and overhead):
Traditional, volume-based costing system 408.00 492.00 606.00
.......................................................................
Activity-based costing system 403.50 483.15 663.90
.......................................................................
Sales price data:
Original target price (130% of product cost 530.40 639.60 787.80
based on traditional, volume-based costing
system)
.......................................................................
New target price (130% of product cost based 524.55 628.10 863.07
activity-based costing system)
.......................................................................
Actual current selling price................................... 525.00 628.00 800.00

5. The REG and ADV products were overcosted by the traditional system, and the
GMT product was undercosted by the traditional system

Reported unit product cost:

Traditional, volume-based costing system $408.00 $492.00 $606.00
.......................................................................
Activity-based costing system 403 .50 483 .15 663 .90
.......................................................................
Cost distortion:
REG and ADV overcosted by traditional system $ 4 .50 $ 8 .85
.......................................................................
GMT undercosted by traditional system............. ($ 57 .90)

6. The electronic version of the Solutions Manual “BUILD A SPREADSHEET

SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website:
www.mhhe.com/hilton8e.

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-11
PROBLEM 5-48 (30 MINUTES)

1. Deluxe manufacturing overhead cost:

32,000 machine hours x $80 = $2,560,000
$2,560,000 ÷ 16,000 units = $160 per unit

Executive manufacturing overhead cost:

45,000 machine hours x $80 = $3,600,000
$3,600,000 ÷ 30,000 units = $120 per unit

Deluxe Executive

Direct $ 40 $ 65
material……………….
Direct 25 25
labor…………………..
Manufacturing overhead…. 160 120
Unit cost………………… $225 $210

2. Activity-based application rates:

Activity Application
Activity Cost Driver Rate

Manufacturing $1,344,00 ÷ 160 setups (SU) = $8,400 per

setups 0 SU

Machine 3,696,00 ÷ 77,000 machine = $48 per MH

processing 0 hours (MH)

Product 1,120,00 ÷ 350 outgoing = $3,200 per

shipping 0 shipments OS
(OS)

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Managerial Accounting, 8/e 5-12
PROBLEM 5-48 (CONTINUED)

Manufacturing setup, machine processing, and product shipping costs of a

Deluxe unit and an Executive unit:

Activity Deluxe Executive

Manufacturing setups:
100 SU x $8,400…………….. $
840,000
60 SU x $8,400…………….. $
504,000
Machine processing:
32,000 MH x $48…………... 1,536,00
0
45,000 MH x $48…………... 2,160,00
0
Product shipping:
200 OS x $3,200…………… 640,00
0
150 OS x $3,200…………….. 480,00
0
Total ……………………………. $3,016,00 $3,144,00
0 0

Production volume (units)…. 16,000 30,000

Cost per unit………………….. $188.50* $104.80**

* $3,016,000 ÷ 16,000 units = $188.50

** $3,144,000 ÷ 30,000 units = $104.80

The manufactured cost of a Deluxe cabinet is $253.50, and the manufactured

cost of an Executive cabinet is $194.80. The calculations follow:

Deluxe Executive

Direct $ 40.00 $ 65.00

material…………………………………
Direct 25.0 25.00
labor……………………………………. 0
Manufacturing setup, machine
processing, and outgoing shipments.. 188.50 104.80
Total $253.50 $194.80
cost……………………………………….

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Managerial Accounting, 8/e 5-13
 3. The Deluxe storage cabinet is undercosted. The use of machine hours
produced a unit cost of $225; in contrast, the more accurate activity-based-
costing approach shows a unit cost of $253.50. The difference between these
two amounts is $28.50.

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-14
PROBLEM 5-48 (CONTINUED)

4. Cost distortion:

The Deluxe cabinet product line is undercosted by $456,000, and the Executive
cabinet product line is overcosted by $456,000. Supporting calculations follow:

Deluxe Executive

$28.50*  16,000 = $456,000 $(15.20) †  30,000 = $(456,000)

*$253.50  $225.00 †
$194.80  $210.00

5. No, the discount is not advisable. The regular selling price of $270, when
compared against the more accurate ABC cost figure, shows that each sale
provides a profit to the firm of $16.50 ($270.00 - $253.50). However, a $30
discount will actually produce a loss of $13.50 ($253.50 - $240.00), and the
more units that are sold, the larger the loss. Notice that with the less-accurate,
machine-hour-based figure ($225), the marketing manager will be misled,
believing that each discounted unit sold would boost income by $15 ($240 -
$225).

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-15
PROBLEM 5-49 (25 MINUTES)

1. a. Manufacturing overhead costs include all indirect manufacturing costs (all

production costs except direct material and direct labor). Typical overhead
costs include:

 Indirect labor (e.g., a lift-truck driver, maintenance and inspection labor,

engineering labor, and supervisors).

 Indirect material.

 Other indirect manufacturing costs (e.g., building maintenance, machine

and tool maintenance, property taxes, insurance, depreciation on plant and
equipment, rent, and utilities).

b. Companies develop overhead rates before production to facilitate the costing of

products as they are completed and shipped, rather than waiting until actual
costs are accumulated for the period of production.

2. The increase in the overhead rate should not have a negative impact on the
company, because the increase in indirect costs was offset by a decrease in
direct labor.

3. Rather than using a plantwide overhead rate, Digital Light could implement
separate activity cost pools. Examples are as follows:

 Separate costs into departmental overhead accounts (or other relevant

pools), with one account for each production and service department. Each
department would allocate its overhead to products on the basis that best
reflects the use of these overhead services.

 Treat individual machines as separate cost centers, with the machine costs
collected and charged to the products using machine hours.

4. An activity-based costing system might benefit Digital Light because it assigns

costs to products according to their usage of activities in the production
process. More accurate product costs are the result.

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-16
PROBLEM 5-50 (30 MINUTES)

1. Predetermined overhead rate = budgeted overhead ÷ budgeted direct-labor

hours
= $710,000 ÷ 20,000* = $35.50 per direct labor
hour

*20,000 budgeted direct-labor hours = (2,500 units of Medform)(3 hrs./unit) +

(3,125 units of Procel)(4 hrs./unit)

Medform Procel

Direct material........................... $ 30.00 $ 45.00

Direct labor:
3 hours x $15........................ 45.00
4 hours x $15........................ 60.00
Manufacturing overhead:
3 hours x $35.50................... 106.50
4 hours x $35.50................... 142.00
Total cost................................... $181.50 $247.00

2. Activity-based overhead application rates:

Activity Cost Application

Activity Cost Driver Rate

Order $120,000 ÷ 600 orders = $200 per

processing processed (OP) OP

Machine 500,000 ÷ 50,000 machine = $10 per MH

processing hrs. (MH)

Product 90,000 ÷ 15,000 = $6 per IH

inspection inspection
hrs. (IH)

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Managerial Accounting, 8/e 5-17
PROBLEM 5-50 (CONTINUED)

Order processing, machine processing, and product inspection costs of a

Medform unit and an Procel unit:

Activity Medform Procel

Order processing:
350 OP x $200.................. $ 70,000
250 OP x $200.................. $ 50,000
Machine processing:
23,000 MH x $10............... 230,000
27,000 MH x $10............... 270,000
Product inspection:
4,000 IH x $6................... 24,000
11,000 IH x $6................... 66,000
Total $324,000 $386,000

Production volume (units) 2,500 3,125

Cost per unit $129.60* $123.52**

* $324,000 ÷ 2,500 units = $129.60

** $386,000 ÷ 3,125 units = $123.52

The manufactured cost of a Medform unit is $204.60, and the manufactured

cost of a Procel unit is $228.52:

Medform Procel

Direct $ 30.00 $ 45.00

material……………………………….
Direct labor:
3 hours x 45.00
$15……………………………
4 hours x 60.00
$15……………………………
Order processing, machine
processing, and product 129.60 123.52
inspection………………..
Total $204.60 $228.52
cost…………………………………….

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-18
PROBLEM 5-50 (CONTINUED)

3. a. The Procel product is overcosted by $18.48 ($247.00 - $228.52) under

the traditional product-costing system. The labor-hour application base
resulted in a $247 unit cost; in contrast, the more accurate ABC
approach yielded a lower unit cost of $228.52. The opposite situation
occurs with the Medform product, which is undercosted by $23.10 under
the traditional approach ($181.50 vs. $204.60 under ABC).

The traditional costing system overcosts the Procel product line by a

total of $57,750 ($18.48 x 3,125 units), and it undercosts the Medform
product line by the same amount, $57,750 ($23.10 x 2,500 units).

b. Yes, especially since Meditech’s selling prices are based heavily on

cost. An overcosted product will result in an inflated selling price, which
could prove detrimental in a highly competitive marketplace. Customers
will be turned off and will go elsewhere, which hurts profitability. With
undercosted products, selling prices may be too low to adequately cover
a product’s more accurate (higher) cost. This situation is also
troublesome and will result in lower income reported for the company.

4. The electronic version of the Solutions Manual “ BUILD A SPREADSHEET

SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website:
www.mhhe.com/hilton8e.

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-19
PROBLEM 5-51 (30 MINUTES)

1. Valdosta Vinyl Company (VVC) is currently using a plantwide overhead rate that is
applied on the basis of direct-labor dollars. In general, a plantwide manufacturing-
overhead rate is acceptable only if a similar relationship between overhead and
direct labor exists in all departments or the company manufactures products that
receive the same proportional services from each department

In most cases, departmental overhead rates are preferable to plantwide

overhead rates because plantwide overhead rates do not provide the following:

 A framework for reviewing overhead costs on a departmental basis, identifying

departmental cost overruns, or taking corrective action to improve departmental
cost control.

 Sufficient information about product profitability, thus increasing the difficulties

associated with management decision making.

2. Because the company uses a plantwide overhead rate applied on the basis of direct-
labor dollars, the elimination of direct labor in the Molding Department through the
introduction of robots may appear to reduce the overhead cost of the Molding
Department to zero. However, this change will not reduce fixed manufacturing costs
such as depreciation and plant supervision. In reality, the use of robots is likely to
increase fixed costs because of increased depreciation. Under the current method of
allocating overhead costs, these costs merely will be absorbed by the remaining
departments.

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-20
PROBLEM 5-51 (CONTINUED)

3. a. In order to improve the allocation of overhead costs in the Cutting and

Finishing departments, management should move toward an activity-based
costing system. The firm should:

 Establish activity-cost pools for each significant activity.

 Select a cost driver for each activity that best reflects the relationship of the
activity to the overhead costs incurred.

b. In order to accommodate the automation of the Molding Department in its

overhead accounting system, the company should:

 Establish a separate overhead pool and rate for the Molding Department.

 Identify fixed and variable overhead costs and establish fixed and variable
overhead rates.

 Apply overhead costs to the Molding Department on the basis of robot or

machine hours.

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-21
PROBLEM 5-52 (40 MINUTES)

1. Overhead to be assigned to development chemical order:

Assigned
Activity Cost Pool Level of Overhead
Pool Rate Cost Driver Cost
Machine setups $4,000 per setup  6 setups $24,000
Material handling $4 per pound  9,000 pounds 36,000
Hazardous waste $10 per pound  2,100 pounds 21,000
control
Quality control $150 per inspection  8 inspections 1,200
Other overhead costs $20 per machine  550 machine hours  11,000
hour
Total $93,200

2. Overhead cost $93,200

 $93.20per box
=
per 1,000boxes
box of chemicals

3. Predetermined total budgeted overhead cost $2,500,000

= 
overhead rate total budgeted machine hours 40,000
= $62.50 per machine hr.

4. Overhead to be assigned to film development chemical order, given a single

predetermined overhead rate:

a. Total overhead assigned = $62.50 per machine hr.  550 machine hr.
= $34,375

b. Overhead cost per $34,375

 $34.375per box
=
box of chemicals 1,000boxes

5. The radiological development chemicals entail a relatively large number of machine

setups, a large amount of hazardous materials, and several inspections. Thus, they
are quite costly in terms of driving overhead costs. Use of a single predetermined
overhead rate obscures this characteristic of the production job. Underestimating
the overhead cost per box could have adverse consequences for Rapid City
Radiology, Inc. For example, it could lead to poor decisions about product pricing.
The activity-based costing system will serve management much better than the
system based on a single, predetermined overhead rate.

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-22
PROBLEM 5-52 (CONTINUED)

6. The electronic version of the Solutions Manual “ BUILD A SPREADSHEET

SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website:
www.mhhe.com/hilton8e.

PROBLEM 5-53 (20 MINUTES)

1. Calculation of unit cost:

(a) Overhead assigned to plates:

Assigned
Activity Cost Pool Level of Overhead
Pool Rate Cost Driver Cost
Machine setups $4,000 per setup  4 setups $16,000
Material handling $4 per pound  800 pounds 3,200
Hazardous waste $10 per pound  400 pounds 4,000
control
Quality control $150 per inspection  4 inspections 600
Other overhead costs $20 per machine  60 machine hours   1,200
hour
Total $25,000

$25,000
Overheadcost per unit   $250
100plates

(b) Unit cost per plate:

Direct material.......................... $210

Direct labor............................... 60
Manufacturing overhead............  250
Total cost per plate................... $520

2. The electronic version of the Solutions Manual “BUILD A SPREADSHEET

SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website:
WWW.MHHE.COM/HILTON8E.

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-23
PROBLEM 5-54 (50 MINUTES)

1. Activity Cost Pool Type of Activity

I: Machine-related costs Unit-level
II: Setup and inspection Batch-level
III: Engineering Product-sustaining-level
IV: Plant-related costs Facility-level

2. Calculation of pool rates:

I: Machine-related costs:
$1,800,000
18,000machine hrs. = $100 per machine hr.

II. Setup and inspection:

$720,000
= $9,000 per run
80 runs

III. Engineering:
$360,000
200 change orders = $1,800 per change order

IV. Plant-related costs:

$384,000
3,840sq. ft. = $100 per sq. ft.

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-24
PROBLEM 5-54 (CONTINUED)

3. Unit costs for odds and ends:

I: Machine-related costs:
Odds: $100 per machine hr.8 machine hr. per unit = $800 per unit
Ends: $100 per machine hr.2 machine hr. per unit = $200 per unit

II: Setup and inspection:

Odds: $9,000 per run ÷ 25 units per run = $360 per unit
Ends: $9,000 per run ÷ 125 units per run = $72 per unit

III: Engineering:
$1,800per change order  200 change orders  75%
Odds:
1,000units
$270,000
= 1,000units
= $270 per unit
$1,800per change order  200 change orders  25%
Ends:
5,000units
$90,000
= 5,000units
= $18 per unit

IV. Plant-related costs:

Odds: $100per sq. ft.  3,840sq. ft.  80%

1,000units
$307,200
= = $307.20 per unit
1,000units
$100per sq. ft.  3,840sq. ft.  20%
Ends:
5,000units
$76,800
= = $15.36 per unit
5,000units

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-25
PROBLEM 5-54 (CONTINUED)

4. New product cost per unit using the ABC system:

Odds Ends
Direct material...........................................................
$ 160.00 $240.00
Direct labor................................................................
120.00 180.00
Manufacturing overhead:
Machine-related...................................................
800.00 200.00
Setup and inspection............................................ 360.00 72.00
Engineering.........................................................
270.00 18.00
Plant-related........................................................
307.20 15.36
Total cost per unit......................................................
$2,017.20 $725.36

5. New target prices:

Odds Ends
New product cost (ABC).............................................
$2,017.20 $725.36
  120%
Pricing policy.............................................................   120%
New target price.........................................................
$2,420.64 $870.43 (rounded)

6. Full assignment of overhead costs:

Odds Ends
Manufacturing overhead costs:
Machine-related...................................................
$ 800.00 $
200.00
Setup and inspection............................................
360.00 72.00
Engineering.........................................................
270.00 18.00
Plant-related........................................................
307.20 15.3
6
Total overhead cost per unit........................................
$1,737.20 $
305.36
 Production volume..................................................
  1,000     
5,000
Total overhead assigned.............................................
$1,737,200 $1,526,80
0
Total = $3,264,000

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-26
PROBLEM 5-54 (CONTINUED)

7. Cost distortion:

Odds Ends
Traditional volume-based costing system:
reported product cost........................................... $ 664.00 $996.00
Activity-based costing system:
reported product cost........................................... 2,017.20   725.36
Amount of cost distortion per unit................................ $(1,353.20) $270.64

Traditional Traditional
system system
undercosts overcosts
odds by ends by
$1,353.20 $270.64
per unit per unit

Production volume......................................................    1,000   5,000

Total amount of cost distortion for entire
product line..........................................................$(1,353,200 $1,353,200
)

Sum of these two

amounts is zero.

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-27
PROBLEM 5-60 (60 MINUTES)

1. Based on the cost data from Gigabyte's traditional, volume-based product-costing

system, product G is the firm's least profitable product. Its reported actual gross
margin is only $66.00, as compared with $254.25 and $313.50 for products T and
W, respectively. However, the validity of this conclusion depends on the accuracy
of the product costs reported by Gigabyte's product-costing system.

2. Again, based on the product costs reported by the firm's traditional, volume-based
product-costing system, product W appears to be very profitable. As in requirement
(1), however, the validity of this assessment depends on the accuracy of the
reported product costs.

3. Gigabyte's competitors have moved aggressively into the market for gismos
(product G), but they have abandoned the whatchamacallit (product W) market to
Gigabyte.

These competing firms apparently believe they can sell gismos at a much
lower price than Gigabyte's management feels is feasible. This evidence suggests
that Gigabyte's competitors may believe their product cost for gismos is below
Gigabyte's reported product cost. In contrast, Gigabyte's competitors apparently
believe that they cannot afford to sell whatchamacallits at Gigabyte's current price
of $600. Perhaps the competing firms' reported production costs for product W are
higher than the cost reported by Gigabyte's product-costing system.

The danger to Gigabyte is that the company will be forced out of the market
for its second largest selling product. This could be disastrous to Gigabyte, Inc.

4. Percentages for raw-material costs:

Percentage
Annual of Total
Raw-Material Annual Raw-Material Raw-Material
Product Cost per Unit Volume Cost Cost*
G $105.00 8,000 $   840,000   25%
T 157.50 15,000 2,362,500   69%
W 52.50 4,000    210,000   6%
Total $3,412,500 100%

*Percentages rounded to nearest whole percent.

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-28
PROBLEM 5-60 (CONTINUED)

5. Product costs based on an activity-based costing system:

Product Product Product

G T W

Direct material........................................ $105.00 $157.50 $  52.50

Direct labor............................................. 48.00 36.00 24.00
Machinery a.............................................. 110.25 122.50 238.88
Machine setup b....................................... .43 .32 1.89
Inspection c.............................................. 31.50 46.20 157.50
Material handling d................................... 82.03 120.75 39.38
Engineering e...........................................   45.25    6.90  142.21
Total....................................................... $422.46 $490.17 $656.36

a
Machinery:
Product G: ($3,675,000  24%)  8,000 units = $110.25
Product T: ($3,675,000  50%)  15,000 units = $122.50
Product W: ($3,675,000  26%)  4,000 units = $238.88
b
Machine setup:
Product G: ($15,750  22%)  8,000 units = $   .43
Product T: ($15,750  30%)  15,000 units = $   .32
Product W: ($15,750  48%)  4,000 units = $  1.89
c
Inspection:
Product G: ($1,575,000  16%)  8,000 units = $ 31.50
Product T: ($1,575,000  44%)  15,000 units = $ 46.20
Product W: ($1,575,000  40%)  4,000 units = $157.50
d
Material handling:
Product G: ($2,625,000  25%)  8,000 units = $ 82.03
Product T: ($2,625,000  69%)  15,000 units = $120.75
Product W: ($2,625,000  6%)  4,000 units = $ 39.38
e
Engineering:
Product G: ($1,034,250  35%)  8,000 units = $ 45.25
Product T: ($1,034,250  10%)  15,000 units = $   6.90
Product W: ($1,034,250  55%)  4,000 units = $142.21

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-29
PROBLEM 5-60 (CONTINUED)
6. Comparison of reported product costs, new target prices, and actual selling prices:

Product Product Product

G T W
Reported product costs:
Traditional, volume-based costing system $573.00 $508.50 $286.50
Activity-based costing system 422.46 490.17 656.36
Target price based on new product costs
(150%new product cost) 633.69 735.26 984.54
Current actual selling price 639.00 762.75 600.00

7. THE ELECTRONIC VERSION OF THE SOLUTIONS MANUAL “BUILD A

SPREADSHEET SOLUTIONS” IS AVAILABLE ON YOUR INSTRUCTORS CD AND ON THE
HILTON, 8E WEBSITE: WWW.MHHE.COM/HILTON8E.

PROBLEM 5-61 (20 MINUTES)

MEMORANDUM
Date: Today
To: President, Gigabyte, Inc.
From: I.M. Student
Subject: Gigabyte's competitive position
Gigabyte's product-costing system has been providing misleading product cost
information. Our traditional, volume-based costing system overcosted gismos and
thingamajigs, but it substantially undercosted whatchamacallits. As a result Gigabyte has
been overpricing gismos and thingamajigs and underpricing whatchamacallits. The
company has been losing money on every sale in the product W market. Our competitors
have taken advantage of our mispricing by moving aggressively into the gismo market
and abandoning the whatchamacallit market to Gigabyte. As a result, our profitability has
suffered.

I recommend the following courses of action:

1. Implement the new activity-based costing system and revise its database
frequently.
2. Lower the target price of gismos to $639, the current actual selling price. This price
is slightly over our usual 50 percent markup over product cost.
3. Consider lowering the price of thingamajigs to $736 in order to increase demand.
The lower price still yields Gigabyte a 50 percent markup over product cost.

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-30
4. Raise the price of whatchamacallits to $985. If the product does not sell at that
price, consider discontinuing the product line.

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-31
PROBLEM 5-65 (45 MINUTES)

1. Two dimensional ABC:

Cost Assignment View

RESOURCE COSTS
Assignment of resource costs
to activity cost pools
associated with
Process View significant activities
Activity analysis
1 2 3 4 5 6
7 8 9 10 Activity evaluation
11 12
13 14 15 PERFORMANCE
16
MEASURES
ROOT ACTIVITY ACTIVITIES (see req. (4) for examples)
CAUSES TRIGGERS
(see req. (3) for (see req. (2) for
examples) examples)

Assignment of activity
costs to cost objects
using second-stage
cost drivers
COST OBJECTS
(Product lines: cooking
utensils, tableware,
flatware)

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-32
PROBLEM 5-65 (CONTINUED)

2. Triggers for selected activities:

Activity
Number Trigger
(2) Realization by purchasing personnel that they do not fully understand the
part specifications
(9) Realization by purchasing personnel that the ordered part will be (or may
be) late in arriving

(11) Receipt of order

(12) Discovery during inspection that parts do not meet specifications

(13) Discovery that parts do not satisfy intended purpose

3. Possible root causes:

Activity
Number Possible Root Causes*
(2) Unclear specifications
Incomplete specifications
Clear, but apparently wrong, specifications
Undertrained purchasing personnel
(9) Vendor delay
Delay in placing order
Failure by purchasing personnel to make deadline clear
(11) Use of vendor that has not been fully certified as a reliable supplier
Critical importance of parts
(12) Misspecification of parts
Error by purchasing personnel in placing order
Vendor error
Inspector error
(13) Misspecification of parts
Incomplete specifications
Poor product design
Error by purchasing personnel in placing order
Vendor error

*This list is not necessarily complete. Other root causes may exist.

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-33
PROBLEM 5-65 (CONTINUED)

4. Suggested performance measures:

Activity Performance
Number Measures
(5) Average price paid

(6) Number of vendors

Number of vendors that are precertified as dependable

(10) Percentage of orders received on time

Average delay for delinquent orders

(12) Number of orders returned

Percentage of orders returned

(16) Average dollar value tied up in parts inventory

PROBLEM 5-66 (40 MINUTES)

1. Customer-profitability analysis:

Caltex Trace
Computer Telecom

Sales revenue........................................................... $380,000 $247,600

Cost of goods sold.................................................... 160,000 124,000
Gross margin............................................................ $220,000 $123,600
Selling and administrative costs:
General selling costs............................................ $ 48,000 $ 36,000
General administrative costs................................. 38,000 32,000
Customer-related costs:
Sales activity.................................................. 16,000 12,000
Order taking.................................................... 6,000 8,000
Special handling............................................. 80,000 60,000
Special shipping.............................................. 18,000 20,000
Total selling and administrative costs......................... $206,000 $168,000
Operating income...................................................... $ 14,000 $ (44,400 )

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-34
PROBLEM 5-66 (CONTINUED)

2. The electronic version of the Solutions Manual “BUILD

A SPREADSHEET SOLUTIONS” is available on your
Instructors CD and on the Hilton, 8e website:
www.mhhe.com/hilton8e.

PROBLEM 5-67 (45 MINUTES)

1. Customer-profitability profile (supporting details in the table following the

profile):

Cumulative Operating Income as a

Percentage of Total Operating Income

Customers*

*Customers ranked by operating income.

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-35
 PROBLEM 5-67 (CONTINUED)

Supporting details for customer-profitability profile:

Cumulative
Operating
Income as a
Percentage of
Cumulative Total
Customer Operating Operating Operating
Number a Customer Income Income Income

(1) Network-All, Inc. $186,000 $186,000 39%

(2) Golden Gate Service Associates 142,000 328,000 69%
(3) Graydon Computer Company 120,000 448,000 94%
(4) Mid-State Computing Company 84,000 532,000 111%
(5) Caltex Computer b 14,000 546,000 114%
(6) The California Group 12,000 558,000 117%
(7) Tele-Install, Inc. (36,000) 522,000 109%
(8) Trace Telecom c (44,400) 477,600 100%
a
Customer numbers are ranked by operating income.
b
From solution to preceding problem.
c
From solution to preceding problem.

2. Memorandum

Date: Today

To: I. Sellit, Vice President for Marketing

From: I. M. Student

Subject: Customer-profitability profile

The attached customer-profitability profile shows that two of our customer

relationships are unprofitable (Tele-Install, Inc. and Trace Telecom). As the profile
shows, over half of our operating income is generated by our two most profitable
customer relationships, and 94 percent of our operating profit is generated by our
three most profitable customers.

An activity-based costing analysis of customer-related costs provided the data for the
customer-profitability analysis portrayed in the profile.

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-36
SOLUTIONS TO CASES
CASE 5-68 (45 MINUTES)

1. Activity-based costing (ABC) differs from traditional costing in that it focuses on

activities that consume resources as the fundamental cost drivers. ABC is a two-stage
cost assignment process focused on causality and the determination of cost drivers. It
usually uses several different activities to assign costs to products or services.
Therefore, it is more detailed and more accurate than traditional costing. It also helps
managers distinguish between value added and non-value added activities.

2. Calculations of total activity cost pools and pool rates:

Material handling.... ($113,208  1.06)  [(5 parts  5,000 units) + (10 parts  5,000
units)]
= $120,000*  (25,000 parts + 50,000 parts)
= $120,000  75,000 parts = $1.60 per part

*Rounded

Inspection.............. ($235,850  1.06)  (5,000 hours + 7,500 hours)

= $250,000*  12,500 hours = $20 per inspection hour

*Rounded
Machining............... ($849,056  1.06)  (15,000 hours + 30,000 hours)
= $900,000*  45,000 hours = $20 per machine hour

*Rounded

Assembly............... ($433,962  1.06)  (6,000 hours + 5,500 hours)

= $460,000*  11,500 hours = $40 per assembly hour

*Rounded

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-37
CASE 5-68 (CONTINUED)

3.
JY-63 JY-63 RX-67 RX-67
Estimated Estimated
20x4 20x5 20x4 20x5
Cost Product Cost Product
Data Cost Data Cost
Direct material:
No cost increase.................... $2,000,000 $3,500,000
Direct labor:
Direct labor $370,37 $185,18
0 6
 1.08 cost increase*........... 400,000 200,000
Material handling:
Number of parts 5 10
 units produced..................     5,000
5,000
25,000 50,000
 $1.60 per unit................... 40,000 80,000
Inspection:
Inspection hours 5,000 7,500
 $20 per hour.....................   100,000    150,000
Machining:
Machining activity in 15,000 30,000
hours
 $20 per hour..................... 300,000 600,000
Assembly:
Assembly activity in 6,000 5,500
hours
 $40 per hour..................... 240,000 220,000

Total cost................................ $3,080,000 $4,750,000

*$400,000 and $200,000 are both rounded.

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-38
CASE 5-68 (CONTINUED)

4. CINCINNATI CYCLE COMPANY

BUDGETED STATEMENT OF GROSS MARGIN FOR 20X5
JY-63 RX-67 Total
Sales revenue.......................................... $3,621,000 $4,459,000 $8,080,00
0
Cost of goods manufactured and sold:
Beginning finished-goods inventory.......... $  480,000 $ 600,000 $1,080,00
0
Add: Direct material............................... 2,000,000 3,500,000 5,500,000
Direct labor.................................... 400,000 200,000 600,000
Material handling........................... 40,000 80,000 120,000
Inspection...................................... 100,000 150,000 250,00
0
Machining...................................... 300,000 600,000 900,000
Assembly....................................... 240,000 220,000 460,000
Cost of goods available for sale................ $3,560,000 $5,350,000 $8,910,00
0
Less: Ending finished-goods inventory*. . 431,200 665,000 1,096,20
0
Cost of goods sold................................... $3,128,800 $4,685,000 $7,813,80
0
Gross margin........................................... $ 492,200 $ (226,000 ) $
266,200

*Ending finished-goods inventory = (total product cost  units produced)  ending

inventory in units:

JY-63: ($3,080,000  5,000 units)  700 units = $431,200

RX-67: ($4,750,000  5,000 units)  700 units = $665,000

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-39
 CASE 5-69 (60 MINUTES)

1.
Regular Advanced Deluxe
Model Model Model
Product costs based on traditional,
volume-
based costing system.......................... $210.00 $430.00 $464.00  
× 110%....................................................  110%  110%  110%  
Target price.............................................. $231.00 $473.00 $510.40  

2. Product costs based on activity-based costing system:

Regular Advanced Deluxe

Model Model Model
Direct material.......................................... $ 20.00 $  50.00 $  84.00
Direct labor.............................................. 20.00 40.00 40.00
Machinery depreciation and maintenance a. 62.40 416.00 153.60
Engineering, inspection and
repair of defects b................................. 34.08 87.00 68.15
Purchasing, receiving, shipping, and
material handling c................................ 30.55 104.00 58.50
Factory depreciation, taxes, insurance,
and miscellaneous overhead costs d...... 24.99  178.50   51.17
Total........................................................ $192.02 $875.50 $455.42

a
Pool I:
Depreciation, machinery..................................................... $2,960,000
Maintenance, machinery.....................................................    240,000
Total.................................................................................. $3,200,000

Regular: ($3,200,00039%  20,00 = $ 62.40

) 0
Advanced: ($3,200,00013%  1,000 = $416.00
)
Deluxe: ($3,200,00048%  10,00 = $153.60
) 0

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-40
CASE 5-69 (CONTINUED)
b
Pool II:
Engineering....................................................................... $ 700,000
Inspection and repair of defects..........................................  750,000
Total.................................................................................. $1,450,000

Regular: ($1,450,000    20,00 = $ 34.08

47%) 0
Advanced: ($1,450,000     1,000 = $ 87.00
6%)
Deluxe: ($1,450,000    10,00 = $ 68.15
47%) 0
c
Pool III:
Purchasing, receiving, and shipping.................................... $ 500,000
Material handling...............................................................   800,000
Total.................................................................................. $1,300,000

Regular: ($1,300,000    20,00 = $ 30.55

47%) 0
Advanced: ($1,300,000     1,000 = $104.00
8%)
Deluxe: ($1,300,000    10,00 = $ 58.50
45%) 0
d
Pool IV:
Depreciation, taxes, and insurance for factory..................... $ 600,000
Miscellaneous manufacturing overhead...............................   590,000
Total.................................................................................. $1,190,000

Regular: ($1,190,000   20,00 = $ 24.99

42%) 0
Advanced: ($1,190,000   1,000 = $178.50
15%)
Deluxe: ($1,190,000   10,00 = $51.17
43%) 0

3.
Regular Advanced Deluxe
Model Model Model
Product costs based on activity-based
costing system........................................... $192.02 $875.50 $455.42
× 110%............................................................  110%  110%  110%
New target price............................................... $211.22 $963.05 $500.96

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-41
 The new target price of the regular model, $211.22, is lower than the current actual
selling price, $220.

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-42
CASE 5-69 (CONTINUED)

4. MEMORANDUM

Date: Today

To: President Madison Electric Pump Corporation

From: I.M. Student

Subject: Product costing

Based on the cost data from our traditional, volume-based product-costing system,
our regular model is not very profitable. Its reported actual contribution margin is
only $10 ($220 – $210). However, the validity of this conclusion depends on the
accuracy of the product costs reported by our product-costing system. Our
competitors are selling motors like our standard model for $212. This price
suggests that their product cost is substantially below our previously reported cost
of $210.

Our new, activity-based costing system reveals serious product cost

distortions stemming from our old costing system. The new costing system shows
that the regular model costs only $192.02, which implies a target price of $211.22.
This price is lower than our current actual selling price and roughly consistent with
the price our competitors are charging.

In contrast, our new product-costing system reveals that the advanced

model's product cost is $875.50 instead of the previously reported cost of $430.
The new product cost suggests a target price of $963.05 for the advanced model,
rather than $473, which was our previous target price for the advanced model.

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-43
CASE 5-69 (CONTINUED)

5. The company should adopt and maintain the activity-based costing system. The
price of the regular model should be lowered to the $212. Lowering the price
should enable the firm to regain its competitive position in the market for the
regular model. Further price cuts should be considered if marketing studies
indicate such a move will increase demand.

The price of the advanced model should be set near the target price of
$963.05. If the advanced model does not sell at this price, management should
consider discontinuing the product line. Input from the marketing staff should be
sought before such an action is taken. An important consideration is the extent to
which sales in the regular model and deluxe model markets depend on the firm's
offering a complete product line.

A slight price reduction should be considered for the deluxe model (from
$510.40 down to $500.96). However, the product cost distortion from the old
costing system did not affect this model as seriously as it did the other two.

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Managerial Accounting, 8/e 5-44