Deeds Company sells custom-made machine parts to industrial equipment manufacturers by bidding cost plus 40 percent, where cost is defined as manufacturing cost plus order processing cost. There are two types of customers: those who place small, frequent orders and those who place larger, less frequent orders. Cost and sales information by customer category is provided below. Order-filling capacity is purchased in steps (order-processing clerks) of 1,000, each step costing $40,000; variable order-filling activity costs are $30 per order. The activity capacity is 39,000 orders; thus, the total order-filling cost is $2,715,000 [(39 steps × $40,000) + ($30 × 38,500)]. Current practice allocates ordering cost in proportion to the units purchased. Deeds recently lost a bid for 100 units. (The per-unit bid price was $2 per unit more than the winning bid.) The manager of Deeds was worried that this was a recurring trend for the larger orders. (Other large orders had been lost with similar margins of loss.) No such problem was taking place for the smaller orders; the company rarely lost bids on smaller orders. Required: 1. Calculate the unit bid price offered to Deeds’s customers assuming that order-filling cost is allocated to each customer category in proportion to units sold. 2. Assume that a newly implemented ABC system concludes that the number of orders placed is the best cost driver for the order-filling activity. Assign order-filling costs using this driver to each customer type and then calculate the new unit bid price for each customer type. Using this new price, would Deeds have won the bid for the 100 units recently lost? 3. What if Deeds offers a discount for orders of 35 units or more to the frequently ordering customers? Assume that all the frequently ordering customers can and do take advantage of this offer at the minimum level possible. Can Deeds offer the original price from Requirement 1 to the frequently ordering customers and not decrease its profitability?

BuyFind

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
BuyFind

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

Solutions

Chapter
Section
Chapter 11, Problem 3CE
Textbook Problem

Deeds Company sells custom-made machine parts to industrial equipment manufacturers by bidding cost plus 40 percent, where cost is defined as manufacturing cost plus order processing cost. There are two types of customers: those who place small, frequent orders and those who place larger, less frequent orders. Cost and sales information by customer category is provided below.

Chapter 11, Problem 3CE, Deeds Company sells custom-made machine parts to industrial equipment manufacturers by bidding cost

Order-filling capacity is purchased in steps (order-processing clerks) of 1,000, each step costing $40,000; variable order-filling activity costs are $30 per order. The activity capacity is 39,000 orders; thus, the total order-filling cost is $2,715,000 [(39 steps × $40,000) + ($30 × 38,500)]. Current practice allocates ordering cost in proportion to the units purchased.

Deeds recently lost a bid for 100 units. (The per-unit bid price was $2 per unit more than the winning bid.) The manager of Deeds was worried that this was a recurring trend for the larger orders. (Other large orders had been lost with similar margins of loss.) No such problem was taking place for the smaller orders; the company rarely lost bids on smaller orders.

Required:

  1. 1. Calculate the unit bid price offered to Deeds’s customers assuming that order-filling cost is allocated to each customer category in proportion to units sold.
  2. 2. Assume that a newly implemented ABC system concludes that the number of orders placed is the best cost driver for the order-filling activity. Assign order-filling costs using this driver to each customer type and then calculate the new unit bid price for each customer type. Using this new price, would Deeds have won the bid for the 100 units recently lost?
  3. 3. What if Deeds offers a discount for orders of 35 units or more to the frequently ordering customers? Assume that all the frequently ordering customers can and do take advantage of this offer at the minimum level possible. Can Deeds offer the original price from Requirement 1 to the frequently ordering customers and not decrease its profitability?

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Chapter 11 Solutions

Cornerstones of Cost Management (Cornerstones Series)
Ch. 11 - What are the four stages of the consumption life...Ch. 11 - Life-cycle cost reduction is best achieved during...Ch. 11 - What is target costing? What role does it have in...Ch. 11 - Explain why JIT with dedicated cellular...Ch. 11 - Explain how backflush costing works.Ch. 11 - Woodruff Company is currently producing a...Ch. 11 - Ventana Company is a car window repair and...Ch. 11 - Deeds Company sells custom-made machine parts to...Ch. 11 - Kagle design engineers are in the process of...Ch. 11 - Hepworth Company has implemented a JIT system and...Ch. 11 - Keith Golding has decided to purchase a personal...Ch. 11 - San Jose Goodwill Bank has been experiencing...Ch. 11 - Classify the following cost drivers as structural,...Ch. 11 - McConkie Company has decided to pursue a cost...Ch. 11 - Jackson, Inc., manufactures motorcycles. Jackson...Ch. 11 - Assign the customer-related activity costs to each...Ch. 11 - The following series of statements or phrases are...Ch. 11 - Assume that a company has recently switched to JIT...Ch. 11 - Prior to installing a JIT system, Barker Company,...Ch. 11 - Potter Company has installed a JIT purchasing and...Ch. 11 - Potter Company has installed a JIT purchasing and...Ch. 11 - Potter Company has installed a JIT purchasing and...Ch. 11 - Bunker Company produces two types of glucose...Ch. 11 - Which of the following is a true statement about...Ch. 11 - Which of the following is a true statement about...Ch. 11 - This year, Hassell Company will ship 4,000,000...Ch. 11 - Standard Company has two suppliers: Day and...Ch. 11 - The second stage of customer-based activity-based...Ch. 11 - Evans, Inc., has a unit-based costing system....Ch. 11 - Cortalo, Inc., manufactures riding lawn mowers....Ch. 11 - Moss Manufacturing produces several types of...Ch. 11 - Maxwell Company produces a variety of kitchen...Ch. 11 - Pawnee Works makes machine parts for manufacturers...Ch. 11 - Nico Parts, Inc., produces electronic products...Ch. 11 - Jolene Askew, manager of Feagan Company, has...Ch. 11 - Homer Manufacturing produces different models of...Ch. 11 - Mott Company recently implemented a JIT...Ch. 11 - Southward Company has implemented a JIT flexible...Ch. 11 - Reddy Heaters, Inc., produces insert heaters that...

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