BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

Solutions

Chapter
Section
BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
54 views

Grundvig Manufacturing produces several types of bolts used in aircraft. The bolts are produced in batches and grouped into three product families. Because the product families are used in different kinds of aircraft, customers also can be grouped into three categories, corresponding to the product family that they purchase. The number of units sold to each customer class is the same. The selling prices for the three product families range from $0.50 to $0.80 per unit. Historically, the costs of order entry, processing, and handling were expensed and not traced to individual customer groups. These costs are not trivial and totaled $9,000,000 for the most recent year. Recently, the company started emphasizing a cost reduction strategy with an emphasis on creating a competitive advantage.

Upon investigation, management discovered that order-filling costs were driven by the number of customer orders processed with the following cost behavior:

Step-fixed cost component: $50,000 per step (2,000 orders define a step)*

Variable cost component: $20 per order

*Grundvig currently has sufficient steps to process 200,000 orders.

The expected customer orders for the year total 200,000. The expected usage of the order-filling activity and the average size of an order by customer category follow:

Chapter 5, Problem 58P, Grundvig Manufacturing produces several types of bolts used in aircraft. The bolts are produced in

As a result of cost behavior analysis, the marketing manager recommended the imposition of a charge per customer order. The charge was implemented by adding the cost per order to the price of each order (computed by using the projected ordering costs and expected orders). This ordering cost was then reduced as the size of the order increased and was eliminated as the order size reached 2,000 units. Within a short period of communicating this new price information to customers, the average order size for all three product families increased to 2,000 units.

Required:

  1. 1. CONCEPTUAL CONNECTION Grundvig traditionally has expensed order-filling costs. What is the most likely reason for this practice?
  2. 2. Calculate the cost per order for each customer category. (Note: Round to two decimal places.)
  3. 3. CONCEPTUAL CONNECTION Calculate the reduction in order-filling costs produced by the change in pricing strategy (assuming that resource spending is reduced as much as possible and that the total units sold remain unchanged). Explain how exploiting customer activity information produced this cost reduction. Would any other internal activities benefit from this pricing strategy?

1.

To determine

Explain the most likely reason for the given practice.

Explanation

Activity Based Costing (ABC):

Activity based costing is a apportionment of costs that first considers the activity drivers that helps in the allocation of costs to various activities and then allocates costs to different cost objects by using the drivers.

According to the generally accepted accounting principles, all manufacturing costs should be expensed during the particular period in which the expenses are incurred. The limitation of GAAP is that the information provided related to the cost management is emphasized...

2.

To determine

Compute the value of cost per order for each customer category.

3.

To determine

Compute the reduction in order-filling costs that is produced by the change in pricing strategy. Discuss how exploiting customer activity information produced this cost reduction. Also, identify whether there is any internal activity benefit from this pricing strategy.

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

What is the importance of the SPL?

Accounting Information Systems

In what way is a college degree a form of capital?

Principles of Macroeconomics (MindTap Course List)

How can service firms measure customer satisfaction?

Foundations of Business (MindTap Course List)

Describe the transactions recorded in the following T accounts:

College Accounting (Book Only): A Career Approach

List the 10 steps in the accounting cycle.

College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)

RECEIVABLES INVESTMENT McDowell Industries sells on terms of 3,10, net 30. Total sales for the year are 912,500...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)