CHAPTER 10

COST PLANNING FOR THE PRODUCT LIFE CYCLE: TARGET

COSTING, THEORY OF CONSTRAINTS,
AND LONG-TERM PRICING
QUESTIONS
10-1 A firm has two options for reducing costs to a target cost level:
a. Reduce costs to a target cost level by integrating new manufacturing
technology, using advanced cost management techniques such as activity-based
costing, and seeking higher productivity through improved organization and
labor relations. his method of cost reduction is common in specialized
equipment manufacturing.
b. Reduce cost to a target cost level by redesigning a popular product. his
method is the more common of the two, because it recognizes that design
decisions account for much of total product life cycle costs !see "#hibit $%-&'. (y
careful attention to design, significant reductions in total cost are possible. his
approach to target costing is associated primarily with )apanese manufacturers,
especially oyota, which is credited with developing the method in the mid
$*+%s. his method of cost reduction is common in consumer electronics.
10-2 he sales life cycle refers to the phase of the product,s sales in the market - from
introduction of the product to decline and withdrawal from the market. -n
contrast, the cost life cycle refers to the activities and costs incurred in
developing a product, designing it, manufacturing it, selling it and servicing it.
he phases of the sales life cycle are:
.hase /ne: .roduct -ntroduction. -n the first phase there is little
competition, and sales rise slowly as customers become aware of the new
product. 0osts are relatively high because of high R12 e#penditures and capital
costs for setting up production facilities and marketing efforts. .rices are
relatively high because of product differentiation and the high costs at this
phase. .roduct variety is limited.
.hase wo: 3rowth. 4ales begin to grow rapidly and product variety
increases. he product continues to en5oy the benefits of differentiation. here
is increasing competition and prices begin to soften.
.hase hree: 6aturity. 4ales continue to increase but at a decreasing
rate. here is a reduction in the number of competitors and product variety.
.rices soften further, and differentiation is no longer important. 0ompetition is
based on cost, given competitive quality and functionality.
.hase 7our: 2ecline. 4ales begin to decline, as does the number of
competitors. .rices stabilize. "mphasis on differentiation returns. 4urvivors are
able to differentiate their product, control costs, and deliver quality and e#cellent
service. 0ontrol of costs and an effective distribution network are key to
continued survival.
Solutions Manual 10-1
10-3 he strategic pricing approach changes over the sales life cycle of the product.
-n the first phase, pricing is set relatively high to recover development costs and
to take advantage of product differentiation and the new demand for the product.
-n the second phase, pricing is likely to stay relatively high as the firm attempts
to build profitability in the growing market. Alternatively, to maintain or increase
market share at this time, relatively low prices !8penetration pricing9' might be
used. -n the latter phases, pricing becomes more competitive, and target costing
and life-cycle costing methods are used, as the firm becomes more of a price
taker rather than a At least three factors that make sensitivity analysis
prevalent in decision making including the following price setter, and
efforts are made to reduce upstream !for product enhancements' and
downstream costs.
10-4 At the introduction and into the growth phases, the primary need is for value
chain analysis, to guide the design of products in a cost-efficient manner. 6aster
budgets !0hapter :' are also used in these early phases to manage cash flows;
there are large developmental costs at a time when sales revenues are still
relatively small. hen, as the strategy shifts to cost leadership in the latter
phases, the goal of the cost management system is to provide the detailed
budgets and activity-based costing tools for accurate cost information.
10-5 arget costing is a method by which the firm determines the desired cost for the
product, given a competitive market price, so that the firm can earn a desired
profit. -t is used by several manufacturing firms, particularly in the automotive
and consumer products industries, such as <onda, oyota, 7ord, =olkswagen,
and /lympus camera.
10-6 >ife-cycle costing considers the entire cost life cycle of the product, and thus
provides a more complete perspective of product costs and product profitability.
-t is used to manage the total costs of the product across its entire life cycle. 7or
e#ample, design and development costs may be increased in order to decrease
manufacturing costs and service costs later in the life cycle.
10-7 here are five steps in /0 analysis:
4tep /ne: -dentify the 0onstraint
?se a flow diagram. he constraint is a resource that limits production to
less than market demand.
4tep wo: 2etermine the 6ost "fficient ?tilization of "ach 0onstraint
.roduct mi# decision: based on capacity available at the constraint, find
the most profitable product mi#.
6a#imize flow through the constraint:
-reduce setups
-reduce lot sizes
-focus on throughput rather than efficiency
Blocher,Chen,Cokins,Lin: Cost Management 3e 10-2 The McGraw-Hill Co!anies, "nc#, 200$
4tep hree: 6a#imize the 7low hrough the 0onstraint
2rum-(uffer-Rope concept: maintain a small amount of work-in-process
!buffer' and insert materials only when needed !drum' by the constraint, given
lead times !rope'. All resources are coordinated to keep the constraint busy
without a build-up of work.
4tep 7our: -ncrease 0apacity on the 0onstrained Resource
-nvest in additional capacity if it will increase throughput greater than the
cost of the investment. 2o not move to investment until steps two and three are
complete, that is, ma#imize the productivity of the process through the constraint
with e#isting capacity.
4tep 7ive: Redesign the 6anufacturing .rocess for 7le#ibility and 7ast
hroughput
0onsider a redesign of the product of production process, to achieve
faster throughput.
/ne could argue that any step could be the most important; for e#ample
step one can be considered to be the most important because of the analysis
undertaken is intended to improve the speed of product flow through the
constraint.
10- /0 emphasizes the improvement of throughput by removing or reducing the
!"#$%&'(#%$, which are bottlenecks in the production process that slow the rate
of output. hese are often identified as processes wherein relatively large
amounts of inventory are accumulating, or where there appear to be large lead
times. ?sing /0 the management accountant speeds the flow of product
through the constraint, and chooses the mi# of product so as to ma#imize the
profitability of the product flow through the constraint.
10-) he purpose of the flow diagram is to assist the management accountant in the
first step of /0, to identify the constraints.
10-10 he methods of product engineering and design in life-cycle costing are:
(asic engineering is the method in which product designers work
independently from marketing and manufacturing to develop a design from
specific plans and specifications.
.rototyping is a method in which functional models of the product are
developed and tested by engineers and trial customers.
emplating is a design method in which an e#isting product is scaled up
or down to fit the specifications of the desired new product.
0oncurrent engineering, or 8simultaneous9 engineering, is an important
new approach in which product design is integrated with manufacturing and
marketing throughout the product,s life cycle.
10-11 =alue engineering is used in target costing to reduce product cost by analyzing
the tradeoffs between different types and levels of product functionality and total
product cost. wo common forms of value engineering are:
Solutions Manual 10-3
2esign analysis is a process where the design team prepares several
possible designs of the product, each having similar features but different levels
of performance on these features and different costs.
7unctional analysis is a process where each ma5or function or feature of
the product is e#amined in terms of its performance and cost.
10-12 Activity-based costing !A(0' is used to assess the profitability of products, 5ust
as is /0. he difference is that /0 takes a short-term approach to
profitability analysis, while A(0 develops a longer-term analysis. he /0
analysis has a short-term focus because of its emphasis on materials related
costs only, while A(0 includes all product costs. /n the other hand, unlike /0,
A(0 does not e#plicitly include the resource constraints and capacities of
production operations. hus, A(0 cannot be used to determine the short-term
best product mi#. A(0 and /0 are thus complementary methods; A(0
provides a comprehensive analysis of cost drivers and accurate unit costs as a
basis for strategic decisions about long-term pricing and product mi#. -n
contrast, /0 provides a useful method for improving the short-term profitability
of the manufacturing plant through short-term product mi# ad5ustments and
through attention to production bottlenecks.
10-13 /0 is appropriate for many types of manufacturing, service and not-for-profit
firms. -t is most useful where the product or service is prepared or provided in a
sequence of inter-related activities as can be described in a network diagram
such as shown in "#hibit $%-+. he most common users of /0 to date have
been manufacturing firms who use it to identify machines or steps in the
production process which are bottlenecks in the flow of product and profitability.
10-14 arget costing is most appropriate for firms that are in a very competitive
industry, so that the firms in the industry compete simultaneously on price,
quality and product functionality. -n very competitive markets such as this, target
costing is used to determine the desired level of functionality the firm can offer
for the product while maintaining high quality and meeting the competitive price.
10-15 >ife-cycle costing is most appropriate for firms which have high upstream costs
!i.e. design and development' and downstream costs !i.e. distribution and
service costs'. 7irms with high upstream and downstream costs need to manage
the entire life cycle of costs, including the upstream and downstream costs as
well as manufacturing costs. raditional cost management methods tend to focus
on manufacturing costs only, and for these firms, this approach would ignore a
significant portion of the total costs.
Blocher,Chen,Cokins,Lin: Cost Management 3e 10-% The McGraw-Hill Co!anies, "nc#, 200$
10-16 4trategic pricing is used to help a firm develop and implement its strategy for
success as its products and services mature in the market place. he focus for
new products is typically differentiation and there is a heavy focus on research
and development, while cost control becomes more important as the product
matures. -n contrast, life-cycle costing is used to manage the costs of the
product over its entire cost life-cycle - from research and development and
product testing to manufacturing and finally distribution and customer service.
Solutions Manual 10-$
E*ERCISES
10-17T'&+,% C"$%(#+ -15 .(#/
$. he unit cost is currently @AB:.+% C @$&,D$A,%%%EFA,%%%
he current profit per item is @+$% - @AB:.+% C @+$.B%
hus, the target cost to meet the competitive price is:
@AA% - @+$.B% C @B::.+%
F. he target cost can probably be achieved by efforts in two areas:
a. he standard cost analysis shows an unfavorable materials
variance of @A%%,%%% !@D,%%%,%%% - @+,A%%,%%%' or @F% per unit, a very
significant variance. "fforts to reduce or eliminate this variance will
make the firm much more competitive. Gotice that the labor usage
variance for indirect labor is favorable, and the direct labor variance is
unfavorable. -t may be that additional work is needed setting the
standards.
b. he standard cost shows an unfavorable direct labor variance
of @$FA,%%% !@F,+FA,%%% - @F,A%%,%%%', or @A per unit, an opportunity
for cost savings.
c. he remaining manufacturing costs can be considered non-
value adding costs, since they do not add to the functionality or quality
of the product. "fforts can be made to reduce the total cost of these
manufacturing costs, which now total a significant @B,%*%,%%% or
@$+&.+% per unit.
Blocher,Chen,Cokins,Lin: Cost Management 3e 10-& The McGraw-Hill Co!anies, "nc#, 200$
10-10 T'&+,% C"$%(#+ -30 .(#/
$., F.
&. he solution uses 3oal 4eek or trials in the "#cel sheet. he number of
parts must be reduced to $%$ or fewer to get at least @A% margin.
Solutions Manual 10-'
C"$% '#1 A!%(2(%3 U$'+, 4"& E'!5 P&"16!%
A-$% A-FA A-$% AFA
2irect 6aterials $B&.D+ @ ++.BB @ D:.+A @ BF.BA @
Gumber of parts $F$ *F $$% :$
6achine hours + B A F
-nspecting time $ %.+ $ %.A
.acking time %.D %.B %.D %.F
4et-ups F $ $ $
A!%(2(%3-7'$,1 C"$%$
2irect 6aterials $B&.D+ @ ++.BB @ D:.+A @ BF.BA @
6aterials <andling FDF.FA @ F%D.%% @ FBD.A% @ $:F.FA @
6fg 4upervision $B$.%% @ *B.%% @ $$D.A% @ BD.%% @
Assembly &%:.AA @ F&B.+% @ F:%.A% @ F%+.AA @
4et-ups :*.F% @ BB.+% @ BB.+% @ BB.+% @
-nspection and est &A.%% @ F$.%% @ &A.%% @ $D.A% @
.ackaging $%.A% @ +.%% @ $%.A% @ &.%% @
otal 1,000026 8 673064 8 14025 8 543035 8

.rice $,%A%.%% @ DFA.%% @ :FA.%% @ A*A.%% @
6argin B*.DB @ A$.&+ @ $%.DA @ A$.+A @
0urrent Revised
C"$% '#1 A!%(2(%3 U$'+, 4"& E'!5 P&"16!%
A-$% A-FA A-$% A-FA
2irect 6aterials $B&.D+ @ ++.BB @ D:.+A @ BF.BA @
Gumber of parts $F$ *F 101 :$
6achine hours + B A F
-nspecting time $ %.+ $ %.A
.acking time %.D %.B %.D %.F
4et-ups F $ $ $
A!%(2(%3-7'$,1 C"$%$
2irect 6aterials $B&.D+ @ ++.BB @ D:.+A @ BF.BA @
6aterials <andling FDF.FA @ F%D.%% @ FFD.FA @ $:F.FA @
6fg 4upervision $B$.%% @ *B.%% @ $$D.A% @ BD.%% @
Assembly &%:.AA @ F&B.+% @ FAD.AA @ F%+.AA @
4et-ups :*.F% @ BB.+% @ BB.+% @ BB.+% @
-nspection and est &A.%% @ F$.%% @ &A.%% @ $D.A% @
.ackaging $%.A% @ +.%% @ $%.A% @ &.%% @
otal 1,000026 8 673064 8 771005 8 543035 8

.rice $,%A%.%% @ DFA.%% @ :FA.%% @ A*A.%% @
6argin B*.DB @ A$.&+ @ A&.*A @ A$.+A @
0urrent Revised
.roblem $%-$: !continued'
B. arget costing should be useful to (4- to assist the firm in meeting
the new competition by finding new ways to cut costs without reducing
product quality or functionality.
Blocher,Chen,Cokins,Lin: Cost Management 3e 10-( The McGraw-Hill Co!anies, "nc#, 200$
10-1)T5, I.9'!% "4 E2':6'%(#+ %5, L"!': C"#$%&'(#%$ -10 .(#/
3ordon,s actions have likely caused the bottleneck to change to
another activity. Hhile 3ordon can improve the flow through his own
department, without coordination with other departments the constraint
will simply move another department. he point is that the theory of
constraints must be applied to the entire manufacturing process in an
integrated manner. As bottlenecks are discovered and removed, other
bottlenecks will appear. he ob5ective of /0 is to improve the flow of
product through the factory - to reduce the cycle time and to reduce
the accumulation of work-in-process inventory within the factory.
Solutions Manual 10-)
10-20 P&(!(#+ -25 .(#/
T5, 9&(!,, !"#%&(76%("#, '#1 9&"4(% (#4"&.'%("# ($ '$ 4"::";$0
60 T5, 9&(!(#+ .,%5"1$ 3(,:1 9&(!,$ 4&". 8205050 %" 82220750 T5,
:";,$% 9&(!,, 8205050 5'$ %5, '12'#%'+, %5'% (% 9&"2(1,$ %5, 1,$(&,1
&,%6&# "# (#2,$%.,#%, ' ."&, 9&,!($, $%'%,.,#% "4 %5, 4(&.<$ +"': %5'#
(# %5, "%5,& .,%5"1$0 A:$", %5, :";,& 9&(!, .(+5% 7, '# '12'#%'+, (4
%5, 4(&. ($ %&3(#+ %" '!5(,2, $':,$ +&";%5 '#1 ($ !"#!,&#,1 '7"6%
.'(#%'(#(#+ "& (.9&"2(#+ .'&=,% $5'&, 16&(#+ %6&#$ (# %5, 76$(#,$$
!3!:, 4"& (%$ !6$%".,&$0 T5($ :'%%,& !"#!,&# ($ ,$9,!('::3 (.9"&%'#%
+(2,# %5'% %5, 1,.'#1 4"& %5, 4(&.<$ 9&"16!% ($ ' 1,&(2,1 1,.'#1, '#1
%5,&, ($ :(%%:, %5'% >"5#$"# !'# 1" %" (#4:6,#!, %"%': '6%" $':,$0
Blocher,Chen,Cokins,Lin: Cost Management 3e 10-10 The McGraw-Hill Co!anies, "nc#, 200$
otal =ariable 0osts F,%B%,%%% @
otal 7i#ed 0osts $,F+%,%%%
otal 6anufacturing 0ost F,A$%,%%%
otal 4elling and Administrative D*%,%%%
otal >ife 0ycle 0ost &,&%%,%%%
.er unit 6anufacturing 0ost $FA.A%
.er unit >ife 0ycle 0ost $+A.%%
D,$(&,1 R'%, C"#%&(76%("# G&"$$ O9,&'%(#+
M,%5"1: 4"& M'&=69 P&(!, M'&+(# M'&+(# I#!".,
6arkup on full manufacturing cost +AI F%D @ F,$%$,A%% @ $,+&$,A%% @ :B$,A%% @
6arkup on life cycle costs &AI FFF.DA F,B$A,%%% $,*BA,%%% $,$AA,%%%


.rice to Achieve 2esired 36 I B%.%%I F%*.$D F,$B&,&&& $,+D&,&&& ::&,&&&
.rice to Achieve 2esired >00 I FA.%%I FF%.%% F,&+%,%%% $,:*%,%%% $,$%%,%%%
.rice to Achieve 2esired R/A of $:I FB.AAI F%A.A% F,%D%,%%% $,+%%,%%% :$%,%%%
10-21 L(4, C3!:, C"$%(#+ -20 .(#/
otal 7i#ed 0osts @ F,&%%
&,%%%
A,B%%
+,*F%
+,%%%
F$,%%%
@ BB,+F%
otal variable costs @F.A% J .A% J .A% C @&.A%
>ife-0ycle 0osts C
@ F$,%%% for fleet of canoes
BB+,F%% !annual fi#ed costs # $% years'
FFB,%%% !@&.A% var. costs # +,B%% rentals per yr # $% years'
@+*$,F%%
>ife-0ycle Revenues needed for F%I profit margin C @+*$,F%% E %.:%
C @:+B,%%%
.rice per Rental for F%I profit margin C @:+B,%%% E +B,%%% rentals in
ten years C @$&.A%
Solutions Manual 10-11
10-22 S':,$ L(4,-C3!:, A#':3$($ -5 .(#/
Activities and 6arket 0haracteristics >ife 0ycle 4tage
2ecline in sales 2ecline
Advertising -ntroduction
(oost in production 3rowth
4tabilized profits 6aturity
0ompetitor,s entrance into market 3rowth
6arket Research -ntroduction
6arket 4aturation 6aturity
4tart .roduction -ntroduction
.roduct esting -ntroduction
ermination of .roduct 2ecline
>arge -ncrease in sales 3rowth
Blocher,Chen,Cokins,Lin: Cost Management 3e 10-12 The McGraw-Hill Co!anies, "nc#, 200$
PRO?LEMS
10-23 T'&+,% C"$%(#+ (# ' S,&2(!, F(&. -20 .(#/
$.
-0? $%% -0? *%%
?nit 0ost Kuantity 0ost Kuantity 0ost
=ideo camera @ $A% $ @$A% & @BA%
=ideo monitor DA $ DA $ DA
6otion detector $A A DA : $F%
7loodlight : & FB D A+
Alarm $A $ $A F &%
Hiring .$%Eft D%% D% $,$%% $$%
-nstallation F%Ehr $+ &F% F+ AF%
otal @DF* @$,&+$
-0? $%%: !@:$% - @DF* total costs'E@ :$% C $%I profit margin
-0? *%%: !@$,AF% - @$,&+$'E@$,AF% C $%.B+I profit margin
F. -0? $%%: !@DA% - @DF* total costs'E @DA% C F.:I profit margin
-0? *%%: !@$,&*% - @$,&+$'E@$,&*% C F.%*I profit margin
&. he installation costs are the largest component of cost and this
category could have room for improvement. (y redesigning the layout
of the systems or finding components that integrate more readily, the
installation times could then be reduced. Also, costs could be lowered
by contractual bargaining with electricians to reduce the per hour rates
for installation.
he video equipment and motion detectors are sources of
significant costs, but decreasing the quality or quantity of these items
would substantially change the effectiveness and value of the security
systems.
Solutions Manual 10-13
10-24 T'&+,% C"$%(#+, S%&'%,+3 -15 .(#/
$. cost per unit C
!@F,D%%,%%% J @$,%%%,%%% J @&%%,%%% J @B,%%%,%%%' E $%,%%%
C @:%% per unit
profit per unit C !@:DA price per unit - @:%% cost per unit'C @DA
F. 6achine setups do not add value to the tables.
@&%%,%%% total cost E $%,%%% units C @&% per unit of non-value added
costs
&. @:%% price per unit - @DA profit per unit C @DFA per unit target cost

B. 0ost must be reduced by @:%% - @DFA C @DA. 7irst and foremost,
(enchmark should focus on getting back on budget. -nefficiencies in
materials usage have led to an e#tra @$A.::Eunit in cost
L M!FA,%%%EBFA,%%%' # @F,D%%,%%%NE$%,%%% C @$A.::O.
Also, getting labor on budget would save an additional @$AEunit
L M@$,%%%,%%% # !:A,%%%E$%%,%%%'NE$%,%%% O. his would get costs down
to @D+*.$F per unit !@:%% - @$A - @$A.::'. .art of the additional @BB.$F
!@DA - @$A - @$A.::' of savings needed to attain the @DFA target cost
could come from reducing the non-value added costs from machine
setups. his could be done through product design and manufacturing
process reengineering. Also, a careful e#amination of mechanical
assembly might reveal cost saving opportunities because this category
currently comprises half of the cost per unit. 0utting F P hours off of
mechanical assembly through product innovation or a process change
would provide more than @&% of savings !at @B,%%%,%%%E&F%,%%% C
@$F.A% per hour; savings of F P hours per unit would save F P #
@$F.A% C @&$.FA per unit'
Blocher,Chen,Cokins,Lin: Cost Management 3e 10-1% The McGraw-Hill Co!anies, "nc#, 200$
10025 T'&+,% C"$%(#+ -20 .(#/
$. he target cost, at the price of @$,A%% and the desired margin of F%I
would be
0 C @$,A%% - .F # @$,A%% C @$,F%%
2#
C6&&,#%:3 @(%5 C"$%
R,16!%("#$
S'2(#+$
6anufacturing
0ost
@$,%%% @:&A @:A-FAJ$%A C @$+A
6arketing 0ost F%% F%%
34A 0ost FFA $DA @A%
otal 0ost @$,BFA @$,F$% @F$A
he cost savings of @F$A are not sufficient to get the product total cost
!@$,F$%' down to the desired target cost of @$,F%%. 3iven that Gational
might be willing to pay a higher price, and since the cost difference is
relatively small, it seems that 6orrow should in fact pursue the order. <ere
are some other considerations:
a. 6orrow should consider the short versus the long term issues of taking
on the order. -n the short term, as noted in chapter &, the fi#ed costs of
manufacturing the order will not change and therefore can be considered
irrelevant for the order if it is a one time special order. hus, for a short term
analysis, 6orrow should determine that portion of manufacturing, marketing,
and 34A costs that are fi#ed and e#clude them from the analysis. -n
contrast, if 6orrow e#pects this to be a regular customer, that 6orrow will be
supplying Gational these parts for several months or years, then the total
costs including fi#ed costs are relevant, as in the calculations above. -n the
longer term, 6orrow must cover all costs of production and sale, while in the
short term only the variable costs are relevant.
Solutions Manual 10-1$
P&"7:,. 10-25 -!"#%(#6,1/
b. 6orrow appears to compete in what Robin 0ooper calls the
8confrontation9 strategy !When Lean Enterprises Collide, <arvard (usiness
4chool .ress, $**A' wherein each competitor must simultaneously compete
on the basis of price, quality and functionality. -n 6orrrow,s case,
functionality refers not only to meeting product specifications but also to
8delighting9 the customer with meeting delivery times, reducing lead times,
and minimizing billing and shipping errors, as 6orrow has done. -n a
8confrontation9 type of competition, target costing is particularly valuable, as
0ooper points out, because it provides the firm a mechanism for balancing,
and choosing the proper 8bundle9 of the three aspects of competition: price,
quality and functionality. 7or e#ample, to be most competitive, 6orrow must
spend e#tra dollars to ensure that there are few if any billing and shipping
errors, while at the same time reducing the costs of manufacturing the
product, and maintaining or improving product quality.
c. he problem notes that the manufacturing costs are 8standard9 full costs.
4ince the costs are given at standard, this means that there are no apparent
inefficiencies reflected in the reported @$,BFA. <owever, the question still
remains whether the standard costs are properly determined. 4hould the
standards be revisedQ
Blocher,Chen,Cokins,Lin: Cost Management 3e 10-1& The McGraw-Hill Co!anies, "nc#, 200$
10-26 T'&+,% C"$%(#+A H,':%5 C'&, -20 .(#/
$. he unit cost is @:A C @DD,:$D,A%%E*$A,A%%
he current profit per item is @$$A - @:A C @&%
he target cost to meet the competitive price is @$%* - @&% C @D*.
F. he unit cost is @:+.B+ C @:&,$%*,%*%E*+$,FDA
Gote: @DD,:$D,A%% J !@DD,:$D,A%%R+.:I' C @:&,$%*,%*%
he current profit per item is @$FA - @:+.B+ C @&:.AB
he target cost is @$FB - @&:.AB C @:A.B+
3# A critical success factor is the relationship with network providers.
"stablishing a good working relationship with its providers improves
the likelihood that the clinicians will follow the <6/,s protocols.
0ustomer satisfaction is essential, so 62 .lus should measure and
monitor the satisfaction levels of their patients, employees, network
providers and referring physicians. 4ince quality of care is a critical
component of customer satisfaction, a continuous quality improvement
department could be established to monitor the organization,s
effectiveness and efficiency.
Solutions Manual 10-1'
10-27 T'&+,% C"$%A @'&,5"6$(#+ -20 .(#/
0urrent Sear /perating -ncome
4ales @$% # $%%,%%% C @$,%%%,%%%
0osts:
.urchase @A # $%%,%%% C @A%%,%%%
.urchasing order @$%% # $,%%% C $%%,%%%
Harehousing @F% # :,%%% C $+%,%%%
2istributing @:% # A%% C B%,%%%
7i#ed operating cost A%,%%% :A%,%%%
/perating income @$A%,%%%
arget 0ost
4ales @$%.%% # $%%,%%% # .*% C @*%%,%%%
2esired profit $A%,%%%
otal cost allowed @DA%,%%%
otal costs e#cluding warehousing:
.urchase @A%%,%%% # .*: C @B*%,%%%
.urchasing order @$%% # :%% C :%,%%%
2istributing @DA # A%% C &D,A%%
7i#ed operating cost @A%,%%% +AD,A%%
6a#imum warehousing cost @ *F,A%%
Blocher,Chen,Cokins,Lin: Cost Management 3e 10-1( The McGraw-Hill Co!anies, "nc#, 200$
10-2 T'&+,% C"$%(#+A I#%,&#'%("#': -20 .(#/
$. arget manufacturing cost C 0urrent manufacturing cost J 8?.4.
2ifferential9
C @A+ J .rice differential - 0ost differential
C @A+ J @$+ - @$% C @+F
/r:
arget cost C target price T differential advertising and shipping
T desired ?4 profit
@+F C @*% - @$% - @$:
F. he cost differential is @+F - @A+ C @+
<arpers cannot add the lighter weight feature, though it is the
most desired, as the cost of @+.DA is greater than the cost differential
of @+. he best approach might be to add the e#tra-soft insole !@&'
and the longer-wearing sole !@&'.
&. 4trategically, the decision to sell shoes in the ?nited 4tates makes
very good sense. o compete effectively in a competitive global
market such as shoes, a firm has to have an effective presence in all
the key markets, which would include the ?nited 4tates. he
e#perience of competing in the ?nited 4tates should bring profits !due
to the higher prices' and the knowledge obtained from dealing with the
different customers. his knowledge can be used to improve the
firm,s competitiveness in other markets.
Solutions Manual 10-1)
1002) T'&+,% C"$%(#+A C6$%".,& C&(%,&(' -30 .(#/
10, 20
T5, '#':3$($ $5";$ %5'% B"%5,&C !".9"#,#%$ 5'2, %5, 5(+5,$% 2':6,
(#1,D "4 3105 ;5(!5 ($ "7%'(#,1 4&". %5, 2':6, "4 %5, !&(%,&(' %(.,$ %5,
9,&!,#%'+, !"#%&(76%("# "4 %5, B"%5,&C !".9"#,#%$ %" ,'!5 !&(%,&(':
S'4,%3 2':6, E S%3:(#+ E P,&4"&.'#!, E C".4"&% F C".9"#,#% G':6, I#1,D
033 D 01 E015 D 06 E 020 D 0 E 032 D 06 F 3105
T5, 2':6, (#1,D ($ "7%'(#,1 (# ' $(.(:'& .'##,& 4"& %5, "%5,&
!".9"#,#%$0
Blocher,Chen,Cokins,Lin: Cost Management 3e 10-20 The McGraw-Hill Co!anies, "nc#, 200$
C".9"#,#%$ T'&+,% C"$%P,&!,#% G':6, I#1,D
<ull and Ueel F&,%%% F&I FD.&%
4tanding Rig $A,%%% $AI $*.:A
4ails FF,%%% FFI $&.FA
"lectrical $B,%%% $BI :.$%
/ther F+,%%% F+I &$.A%
$%%,%%%
C".9"#,#%H
C&(%,&(' S'4,%3 S%3:(#+ P,&4"&.'#!, C".4"&%
<ull and Ueel &%I F%I B%I F%I
4tanding Rig &%I AI &%I $%I
4ails $%I AI &%I $%I
"lectrical F%I $%I
/ther $%I +%I +%I
$%%I $%%I $%%I $%%I
C".9"#,#%H G':6,
C&(%,&(' S'4,%3 S%3:(#+ P,&4"&.'#!, C".4"&% I#1,D
C&(%,&(' G':6, && $A F% &F $%%
<ull and Ueel &%I F%I B%I F%I FD.&%
4tanding Rig &%I AI &%I $%I $*.:A
4ails $%I AI &%I $%I $&.FA
"lectrical F%I $%I :.$%
/ther $%I +%I +%I &$.A%
$%%I $%%I $%%I $%%I
P&"7:,. 10-2) -!"#%(#6,1/
@5,# %5, 2':6, (#1,D ($ !".9'&,1 %" %5, %'&+,% !"$%, %5, 9,&!,#%'+,
(#2,$%.,#% (# $'(:$ :""=$ %"" 5(+5 I $'(:$ &,J6(&, 22K "4 %"%': !"$%$,
76% "#:3 13025K (# %5, 2':6, (#1,D0 S(.(:'&:3, %5, %'&+,% !"$%$ '99,'& %"
7, 5(+5 -14K/ 4"& %5, ,:,!%&(!': !".9"#,#%$, &,:'%(2, %" !6$%".,& 2':6,
-01K/0 O# %5, "%5,& 5'#1, %5, %'&+,% !"$%$ '99,'& %" 7, %"" :"; 4"& %5,
56:: '#1 =,,:, $%'#1(#+ &(+, '$ ;,:: '$ %5, "%5,& !".9"#,#%$0 T5($
$6++,$%$ %5'% !"#$(1,&'%("# 7, +(2,# %" &,1,$(+# "4 %5, 7"'% %" 7&(#+ (%
."&, (# :(#, ;(%5 !6$%".,& 2':6,0
Solutions Manual 10-21
10-30 T5,"&3 "4 !"#$%&'(#%$ -25 .(#/
7irst, identify the constraint:
ime Required ime
."0-$ ."0-F otal Available
Receiving and
testing
B%#$% J B% #
FAC$,B%%
$A#FAC&DA $,DDA F,%%%
6achining B%#:%C&,F%% &,F%% &,A%%
Assembly B%#BAC$,:%% $A#!BAJ&%'
C$,$FA
F,*FA F,%%%
7inal Assembly B%#+%CF,B%% $A#B%C+%% &,%%% &,A%%
(y inspection, the constraint is Assembly, where there are F,%%%
minutes of time available, but F,*FA minutes required, a deficit of *FA
minutes
4econd: 2etermine the most profitable product mi#
PEC-1 PEC-2
.rice @F%% @FA%
6aterials cost $$% $&D.A%
hroughput margin *% $$F.A%
0onstraint time !min' BA DA
hroughputEminute @F.%% @$.A%
(ased on the profitability analysis, ."0-$ is the most profitable
product, given the constraint on Assembly time. 4o the most
profitable product mi# is B% units of ."0-$ and F units of ."0-F:
PEC-1 PEC-2
2emand B% $A
.roduction plan, ."0-$ B%
0onstraint time used,
remaining
B%#BAC$,:%% F,%%% -$,:%%CF%%
.roduction plan, ."0-F F%%EDACF.++D; round to F
otal hroughput B% # @*% C @&,+%% F # @$$F.A% C @FFA.%%
Blocher,Chen,Cokins,Lin: Cost Management 3e 10-22 The McGraw-Hill Co!anies, "nc#, 200$
10-31 T5,"&3 "4 C"#$%&'(#%$ -30 .(#/
Solutions Manual 10-23
P'&% O#,: I1,#%(43 %5, C"#$%&'(#%
otal ime Required for "ach activity for 3iven 2emand
ime 4lack
able 4ofa otal ime Available ime
0ut $A% &+ $:+ F:% *B
4and $A% *% FB% F:% B%
Assemble &%% &$A +$A D%% :A
4tain $F% *% F$% $B% -D%
0ut 7abric % *% *% $B% A%


P'&% T;": I1,#%(43 M"$% P&"4(%'7:, P&"16!%
able 4ofa
.rice &%% @ AA% @
6aterials 0ost $%% FA%
hroughput 6argin F%% @ &%% @
0onstraint time %.B %.A
hroughputEtime A%% @ +%% @
P'&% T5&,,: I1,#%(43 M"$% P&"4(%'7:, P&"16!% M(D
able 4ofa
2emand &%% $:%
?nits of .roduct !see note' $FA $:%
hroughputEtime A%% @ +%% @
otal hroughput +F,A%% @ $%:,%%% @
Gote: 4ofas are most profitable and go first; total time for sofas C $:% # .A C *%hrs;
otal hours available for ables C $B%-*% C A% hours; total tables
that can be manufactured C A%E.B C $FA tables.
P&"7:,. 10-31 !continued'
F. .art one above solves the first two steps of the /0, to identify the
constraint and determine the most profitable product mi#. he third
step, to ma#imize flow through the constraint, would require <igh .oint
to look for ways to speed up the staining operation, by simplifying it, by
training the operator, or other means. -n the fourth /0 step, <igh
.oint could consider adding a part time employee to add capacity at
the constraint, though it might be difficult to find a skilled employee
who wanted part time work. Adding a full time employee would be
unnecessary and wasteful, unless the motel contract works out. -n the
final /0 step, <igh .oint should consider the possibility of re-design,
by for e#ample using a different type of stain that requires less time
and skill.
Blocher,Chen,Cokins,Lin: Cost Management 3e 10-2% The McGraw-Hill Co!anies, "nc#, 200$
10-32 T5,"&3 "4 C"#$%&'(#%$ - 30 .(#/
Hith the information available 2on can complete the first two steps of
/0 as shown below. he analysis shows that the reactor process is
the constraint, and that in the short run, .olymer $ is the most
profitable product. he most profitable product mi# is +% units of
.olymer $ and F: units .olymer F. ?ntil the production delays can be
dealt with !/0 steps &-A', 2on should advise -.0 to meet all the
sales demand of .olymer $ and to advise customers of .olymer F
there would be some delays in the shortTterm. hen, -.0 should work
quickly to relieve the constraint, reactor time, by applying the third,
fourth and fifth /0 steps. Hithout specialized technical knowledge
of the manufacturing processes in this industry, one can only
speculate about what these steps might be.
F(&$%: I1,#%(43 %5, C"#$%&'(#%
otal ime Required for "ach activity for 3iven 2emand
ime Required for otal ime 4lack
.olymer $ .olymer F ime Available ime
7iltering +%#FC $F% B%#!FJF'C $+% F:% &F% B%
4tripper +%#!$J$'C $F% B%#!FJ$'C $F% FB% &F% :%
Reactor +%#&C $:% B%#A C F%% &:% &F% -+%
7inal 7ilter +%#FC $F% B%# $ C B% $+% $+% %
6i#ing +%#&C $:% B%#& C $F% &%% &F% F%
he reactor is the constraint , since there is a demand of
&:% hours but only &F% hours available.

Solutions Manual 10-2$
P&"7:,. 10-32 !continued'
S,!"#1: I1,#%(43 M"$% P&"4(%'7:, P&"16!%
.olymer $ .olymer F
.rice @ $%A @ $A%
6aterials 0ost BA +%
hroughput 6argin @ +% @ *%
0onstraint time & A
hroughputEtime @ F% @ $:
T5(&1: I1,#%(43 M"$% P&"4(%'7:, P&"16!% M(D
.olymer $ .olymer F
?nits Lfor .olymer F; F: units C
!&F% - +%#&'EAO
+% F:
0ontributionE?nit @+% @*%
otal contribution @&,+%% @ F,AF%
Blocher,Chen,Cokins,Lin: Cost Management 3e 10-2& The McGraw-Hill Co!anies, "nc#, 200$
10-33 T5,"&3 "4 C"#$%&'(#%$ -30 .(#/
$. (akker will not be able to meet the demand. 2epartment $ is a
constraint, based on machine time. He do not consider labor time
because (akker is able to hire and retain all the labor it needs.
2epartments
$ F & B
6achine <ours needed
+$$ $,%%%C
A%%#F
A%%C
A%%#$
$,%%%C
A%%#F
$,%%%C
A%%#F
+$& B%%C
B%%#$
B%%C
B%%#$
% :%%C
B%%#F
+$A F,%%%C
$,%%%#F
F,%%%C
$,%%%#F
$,%%%C
$,%%%#$
$,%%%C
$,%%%#$
otal hours needed &,B%% F,*%% F,%%% F,:%%
<ours Available &,%%% &,$%% F,D%% &,&%%
"#cess !deficiency' !B%%' F%% D%% A%%
2# The *est !ro+uct i, is %00 units o- .ro+uct &13, $00 units o- !ro+uct &11, an+ (00 units o- !ro+uct
&1$#
611 613 615
.rice @$*+ @$F& @$+D
=ariable 0ostV $%& D& *D
hroughputEunit @*& @A% @D%
6achine hours in 2ept $ F $ F
hroughputEhour @B+.A% @A%.%% @&A.%%
V 7or e#ample, variable cost for +$$ C @!DJ$FJF$JFBJ*JFDJ&'
.roductionEsales .lan
otal hours available in 2ept $ &,%%%
7irst: B%% units of +$&; B%%#$ hours B%%
4econd: A%% units of +$$; A%%#F hours $,%%%
<ours remaining
$,+%%
hird: :%% units of +$A; $,+%%EF hours per unit C :%%
All &,%%% hours used
Solutions Manual 10-2'
10-34 L(4,-C3!:, C"$%(#+A E%5(!$ -25 .(#/
$. Haters, analysis based on the prepared report fails to consider the
very significant amount of research and development and selling
costs. -t is unlikely that the two products consumed equal shares of
these costs. As the calculations in part F below illustrate, the
determination of profitability can be significantly affected by the tracing
of these non-manufacturing costs each product. he idea is that life-
cycle costing, including upstream and downstream costs !research
and development, and selling costs, respectively' as well as the
manufacturing costs, is necessary to get an accurate picture of each
products overall profitability.
F.
Rderm Sderm otal
4ales @&,%%%,%%% @F,%%%,%%% @A,%%%,%%%
0ost of goods sold $,*%%,%%% $,+%%,%%% &,A%%,%%%
3ross profit @$,$%%,%%% @ B%%,%%% @$,A%%,%%%
Research and dev. !DF%,%%%' !$:%,%%%' !*%%,%%%'
4elling e#penses !:%,%%%' !F%,%%%' !$%%,%%%'
.rofit before ta#es @&%%,%%% @ F%%,%%% @ A%%,%%%
Return on 4ales @&%%,%%% @ F%%,%%% @ A%%,%%%
@&,%%%,%%% @F,%%%,%%% @ A,%%%,%%%
C $%I C $%I C$%I
he life-cycle product line profitability analysis shows a much different
result.

&.Gow, the two products have the same return on sales. his
illustrates that including the upstream and downstream costs can be
very important in getting a useful analysis of product profitability.
7ailing to include these non-manufacturing costs, as Haters did at
first, may lead to incorrect marketing and management decision
making, as the firm may have a biased and incorrect idea of the most
profitable product!s'.
Blocher,Chen,Cokins,Lin: Cost Management 3e 10-2( The McGraw-Hill Co!anies, "nc#, 200$
10-35 L(4, C3!:, C"$%(#+ -25 .(#/
$.
.rice and ?nits for each sales prediction, B years Gotes
.rice @$A% @$:% @FFA
?nits :%,%%% +%,%%% B:,%%% for B years
/perating .rofit for each price !all figures in @%%%'
Revenue @$F,%%% @$%,:%% @$%,:%%
0ost
R12 @B%% @B%% @A%% more at the @FFA price
.rototyping :%% :%% $,F%% more at the @FFA price
6anufacturing
7i#ed $,F%% $,F%% $,F%% @FA,%%% # $F # B
=ariable $,+%% $,F%% *+% @F% per unit
6arketing
7i#ed DF% *+% *+% less at the @$A% price
=ariable B%% &%% FB% @A per unit
0ustomer 4vc
7i#ed $BB $BB $+: more at the @FFA price
=ariable +B% B:% &:B @: per unit
2istribution
7i#ed FB% FB% FB% @A,%%% # $F # B
=ariable $,F%% *%% *+% @$A per unit !@F% at
the @FFA price'
otal 0osts D,&BB +,+FB +,:$F
/perating .rofit @B,+A+ @B,$D+ @&,*::
F. he @$A% price provides the highest e#pected profit.
Solutions Manual 10-2)
10-36 L(4,-C3!:, C"$%(#+ - 25 .(#/
$. A product life-cycle statement would aggregate the three years into
one show the totals in each category for the 8life9 of the product.
F. >A% appears be more profitable; DD$ vs +D% life cycle profits.
Gote however, that the trend in sales and profits is much more favorable for
>B%. >A%,s life cycle profits are low primarily because of high development
costs in F%%$.
Blocher,Chen,Cokins,Lin: Cost Management 3e 10-30 The McGraw-Hill Co!anies, "nc#, 200$
>B% 2001 2002 2003 T"%':
Revenues :%% @ F,&%% @ &,$%% @ +,F%% @
0osts
Research and 2evelopment $,B%% - - $,B%%
.rototypes &A% A% - B%%
6arketing +% +%% BDA $,$&A
2istribution +% $F% $&% &$%
6anufacturing F% DD% $,&A% F,$B%
0ustomer 4erivce - +% :A $BA
otal 0ost $,:*% $,+%% F,%B% A,A&%

/perating 6argin !$,%*%' D%% $,%+% +D%
>A% 2001 2002 2003 T"%':
Revenues *%% @ $,*%% @ F,F%% @ A,%%% @
0osts
Research and 2evelopment +A% - - +A%
.rototypes &%% &% $% &B%
6arketing $FB F%% F+% A:B
2istribution $D% F%% B$% D:%
6anufacturing :A D%% DD% $,AAA
0ustomer 4erivce - F% &%% &F%
otal 0ost $,&F* $,$A% $,DA% B,FF*

/perating 6argin !BF*' DA% BA% DD$
P&"7:,. 10-36 -!"#%(#6,1/
&.
he analysis shows how the distribution of costs for both products shifts
from research and development in the first year to manufacturing and
customer service in the last year. he shift is most pronounced for >B%
which has high development costs.
Solutions Manual 10-31
>B% 2001 2002 2003
Revenues :%% @ I F,&%% @ I &,$%% @ I
0osts % % %
Research and 2evelopment $,B%% DB.$I - %.%I - %.%I
.rototypes &A% $:.AI A% &.$I - %.%I
6arketing +% &.FI +%% &D.AI BDA F&.&I
2istribution +% &.FI $F% D.AI $&% +.BI
6anufacturing F% $.$I DD% B:.$I $,&A% ++.FI
0ustomer 4erivce - %.%I +% &.:I :A B.FI
otal 0ost $,:*% $,+%% F,%B%
/perating 6argin !$,%*%' D%% $,%+%
>A% 2001 2002 2003
Revenues *%% @ $,*%% @ F,F%% @
0osts % %
Research and 2evelopment +A% B:.*I - %.%I - %.%I
.rototypes &%% FF.+I &% F.+I $% %.+I
6arketing $FB *.&I F%% $D.BI F+% $B.*I
2istribution $D% $F.:I F%% $D.BI B$% F&.BI
6anufacturing :A +.BI D%% +%.*I DD% BB.%I
0ustomer 4erivce - %.%I F% $.DI &%% $D.$I
otal 0ost $,&F* $,$A% $,DA%
/perating 6argin !BF*' DA% BA%
10-37 L(4, C3!:, C"$%(#+A H,':%5 C'&,A D($!"6#%(#+ -30 .(#/
-f 0ure-all were to manufacture the drug themselves, at a sales price
of @F&A the life-cycle costs would be the following:
.rice @F&A
?nits 4old &,%%%,%%%
Revenues @D%A,%%%,%%%
0osts
R12 @$,%%%,%%%
0linical rials @F,$%:,%%%
6anufacturing
7i#ed @A,%%%,%%% # A C @FA,%%%,%%%
=ariable @+:#&,%%%,%%% C @F%B,%%%,%%%
.ackaging
7i#ed @&:%,%%% # A C@$,*%%,%%%
=ariable @F% # &,%%%,%%% C @+%,%%%,%%%
2istribution
7i#ed @$,$FA,%%% # A C @A,+FA,%%%
=ariable @+.A% # &,%%%,%%%C @$*,A%%,%%%
Advertising
7i#ed @F,F:%,%%% # A C @$$,B%%,%%%
=ariable @$F # &,%%%,%%%C @&+,%%%,%%%
otal 0ost @&++,A&&,%%%
/perating -ncome @&&:,B+D,%%%
Blocher,Chen,Cokins,Lin: Cost Management 3e 10-32 The McGraw-Hill Co!anies, "nc#, 200$
P&"7:,. 10-37 !continued'
/utsourcing the manufacturing would result in the following life cycle
costs assuming the cost as @F&A per unit and the changes in the
manufacturing costs:
.rice @F&A
?nits 4old &,%%%,%%%
Revenues @D%A,%%%,%%%
0osts
R12 @$,%%%,%%%
0linical rials @F,$%:,%%%
6anufacturing
7i#ed @$,A%%,%%% # A C@D,A%%,%%%
=ariable @:% # &,%%%,%%%C @FB%,%%%,%%%
.ackaging
7i#ed @&:%,%%% # A C @$,*%%,%%%
=ariable @+%,%%%,%%%
2istribution
7i#ed @$,$FA,%%% # A C@A,+FA,%%%
=ariable @$*,A%%,%%%
Advertising
7i#ed @F,F:%,%%% # A C@$$,B%%,%%%
=ariable @&+,%%%,%%%
otal 0ost @&:A,%&&,%%%
/perating -ncome @&$*,*+D,%%%
/utsourcing the manufacturing results in a lower operating income
than manufacturing the drug themselves.
Solutions Manual 10-33
P&"7:,. 10-37 !continued'
-t appears that selling the drug patent is the best alternative since
receiving @BFA,%%%,%%% !@&%%,%%%,%%% J @FA,%%%,%%% # A' over the
five year period is greater than the operating incomes of both the other
options. <owever, in order to determine the real value of selling the
patent one needs to consider the present value of the annuity stream,
the @FA,%%%,%%% at the end of every year for the ne#t A years. Assume
a discount rate of $%I, and the present value of the five-year annuity
!an annuity factor of &.D*$ at $%I' is @FA,%%%,%%% # &.D*$ C
@*B,DDA,%%%. hus the total value of the sale of the patent is
@*B,DDA,%%% J @&%%,%%%,%%%C @&*B,DDA,%%%. he best alternative is
selling the patent.
Blocher,Chen,Cokins,Lin: Cost Management 3e 10-3% The McGraw-Hill Co!anies, "nc#, 200$
10-3 M'#64'!%6&(#+ C3!:, E44(!(,#!3 -15 .(#/
60" C total processing timeEtotal cycle time
C F&E!F&J&J+J&J$JAJFJ+JF' C F&EA$ C BAI
Gote that new product development time and order taking time are not
considered part of the manufacturing cycle and are e#cluded from
cycle time.
he level of 60" is best interpreted by reference to the prior 60"
values for the firm or to an industry average. A number closer to one
is better. Hhen comparing to an industry average, management
should make sure that the measures are calculated in the same
manner. -n this case, Haymouth has improved significantly on its
60" relative to the prior data, and is higher than the industry average.
Solutions Manual 10-3$
10-3)C"#$%&'(#% A#':3$($A F:"; D('+&'. -A99,#1(D/ -60 .(#/
1# 3race =ander,s accelerated delivery schedule is unsatisfactory in
cutting $% days from the total pro5ect schedule because not all of her
crashed activities are included on the critical path. -n order to reduce
the completion time for a pro5ect, activities along the critical path need
to be chosen to be crashed or reduced. =ander,s selection of
activities 7), "7, and (3, which are on the critical path A(3"7)U, will
reduce total pro5ect completion time only by three days but her
selection of activities <), 3<, 02, and 2" have no impact on the
critical path.
F. (elow is a revised accelerated delivery schedule that meets both
ob5ectives: !$' delivery of the first plane two week !$% working days'
ahead of schedule, and !F' at least incremental cost to 0oastal. All
the paths need to be evaluated when reducing a pro5ect,s completion
time. <owever, the selection of activities to crash should be taken
from the critical path first and then the activities should be selected in
order according to the smallest crash cost. he critical path now
becomes A(02"7)U and will take AD days, having only reduced the
total pro5ect completion date by eight days. herefore, the activity 02
!the ne#t least costly available activity' needs to be crashed two days
which will then bring all paths to AA days or less.
/cti0it1
Crashe+
2a1s
3e+uce+
"ncreental
Cost !er
+a1
"ncreental
Cost
/BG4567 /BGH67 /B4567 /BC24567
ST/3T &$ $3 %$ &%
56 1 8 %00 8 %00 &% $3 %% &3
45 1 (00 (00 &3 $3 %3 &2
67 1 )00 )00 &2 $2 %2 &1
BG 2 1,000 2,000 &0 $0 %2 &1
/B % 1,200 %,(00 $& %& 3( $'
G4 1 1,300 1,300 $$ %$ 3( $'
C2 2 '00 1,%00 $$ %$ 3( $$
Total 811,&00
&. he total incremental costs (ob .eterson will have to pay for this
revised accelerated delivery schedule amount to @$$,+%%, or a new
total pro5ect cost of @D+,D%% from the original @+A,$%%, and a saving of
$% days.
Blocher,Chen,Cokins,Lin: Cost Management 3e 10-3& The McGraw-Hill Co!anies, "nc#, 200$
10-40 P&"16!%("# P:'##(#+ '#1 C"#%&": -30 .(#/
here may be a happy ending to this story if Uristen and (ryan
change the focus in the plant from productivity at each work station
and meeting budgets to a focus on speed and throughput. he
current emphasis on productivity at each work station has the effect
that each employee has the incentive to work very hard to meet their
productivity targets, without a consideration of the overall productivity
of the entire plant. his is why work-in-process inventory builds up in
places. 4ome operators are keen on moving the product through their
work stations, and not concerned about what happens to it
downstream.
Also, the emphasis on meeting cost budgets !as in the case of
the purchasing department manger', creates incentives to reduce
costs in ways which can cause delays and defective products. he
purchase of discounted material which apparently led to product
defects is an e#ample.
he emphasis on individual productivity has other effects. 4ince
it creates a focus only on moving product through individual
processes, inadequate attention appears to be given to equipment
maintenance or to the prevention of defects. here is insufficient
attention to preventing quality defects. -n contrast, there is e#cessive
attention to correcting defects !re-work'. o speed up the process, the
rate of defects has to be reduced. he emphasis on correcting
defects merely slows things down. 4i#-sigma firms such as oyota
and 3" have learned it is less costly as well as faster to prevent
defects rather than to spend time on inspection and re-work.
-nspection and re-work are non-value adding processes that should be
eliminated.
Another unfortunate result of the cost allocation method in the
plant is that department managers apparently have the incentive to
reduce the amount of space in which they operate in order to reduce
the overhead costs allocated to them. his means that some work
stations, for e#ample "d,s, are possibly too small for efficient
processing, leading to lower productivity and increased defects.
Again, the focus of the accounting system has set things awry, and
provided a dysfunctional incentive.
Solutions Manual 10-3'
P&"7:,. 10-40 !continued'
o repair the situation, Uirsten and (ryan should refocus the
plant on throughput and use a system like the theory of constraints.
Hith the theory of constraints, managers and employees are rewarded
for moving total product through the plant, not 5ust through their
individual work stations. "veryone in the plant has the incentive to
look for bottlenecks and to find ways to reduce the effect of these
bottlenecks. 6oreover, employees have the incentive to work together
to reduce the bottlenecks and improve throughput, since the focus is
no longer on individual productivity, but on overall productivity, which
is the plant,s ultimate goal.
4ummary .resentation of .roblem on 0halk (oard:
P&"7:,. A&,'$ M'#64'!%6&(#+ O6%!".,$ P&"4(% O6%!".,$
6aterials quality 2efects up 0osts up
down
0ramped space
7ocus on speed
everywhereW Reduced
!no concern for hroughput /rders delayed, some
downtime or orders and profits
throughput..' lost
H-. up
-ncreased
holding cost
Blocher,Chen,Cokins,Lin: Cost Management 3e 10-3( The McGraw-Hill Co!anies, "nc#, 200$