P1.

Cost considerations in strategic decisions

Branfort Bat co. (BBC) manufactures popular base ball Bats that are praised by professional
and amateur players. The current flexible cost of manufacturing the Bat is $12 per unit. The
cost of operating the Lathe that produces the Bat is about $ 600,000 per year the cost includes
maintenance & physical obsolescence cost.

BBC is now evaluating the possibilities of purchasing a new Lathe to manufacture the Bat. The
new Lathe replaces the mechanical patterns currently used to manufacture Lathes and relies
instead on direct laser sensing by a computer within the Lathe to compare the current size of
the wood stock being turned on the Lathe with a pattern stored in the computers memory.
Although the new machine would not increase the capacity of the Bat making operation, which
is 750,000 Bats per year, it would reduce the cost of producing the Bats to $10 per unit. The
cost of operating the new lathe would be about $ 1,400,000 per year.

If the current level of output of this Bat is 500,000 units should the new Lathe be purchased?
What is your answer if the planned output level were to be (a) 300,000 units & (b) 400,000
units

P2. Variable cost and fixed cost

Consolidated minerals [CM] own the rights to extract minerals from Beach Sand on Frazer
Islands. CM has cost in three areas:

A. Payment to a mining sub-contractor who charges $80 per ton of Beach Sand mined and
returned to the Beach [After being processed on the main land to extract 3 minerals-
ILMENITE, RUTILE, and Zircon]

B. Payment of a govt mining and environmental tax of $50 per ton of Beach sand mined

C. Payment to a BARGE operator. This operator charges $150,000 per month to transport each
batch of beach sand- up to 100 tons per batch per day- to the main land and then return to
Frazer Island. [That is, 0-100 tons per day=$150,000 per month; 101-200 tons per day
=$300,000 per month and so on]. Each BARGE Operates 25 days per month. The $150,000
monthly charged must be paid even if fewer than 100 tons are transported on any day and
even if CM requires fewer than 25 days of BARGE transportation in that month.
CM is currently mining 180 tons of Beach Minerals per day for 25 days per month.

1. What is the Fixed cost & Variable Cost per ton of Beach sand mined?
2. Plot a graph of a Variable cost and another graph of the Fixed Cost of consolidated
Minerals. Is the concept of relevant range applicable to your graphs? Explain.
3. What is the Unit cost per ton of beach sand mined if
[A] 180 tons are mined each day?
[B] 220 tons are mined each day?
[C] 290 tons are mined each day?
Explain the difference in the unit cost figures.

P3. Cost drivers and functions

The list of representative cost drivers in the right column below our randomized with respect to
the list of functions in the left column that is they do not match.

Function Representative Cost Driver

A. Accounting 1. No. of invoices sent

B. Personnel
C. Data Processing
2. No. of purchase orders
D. Research and development 3. No. of Research Scientist
E. Purchasing 4. Hours of computer processing unit[CPU]
F. Billing 5. No of New Hires
6. No of Transactions Processed

Required:
1. Match each function with its representative cost driver.
2. Give a second Example of a cost driver for each function
 P4. Inventoriable Cost v/s period costs
Each of the following cost items pertains to one of these companies: GE [A manufacturing
Sector Co.] Safeway [A merchandising sector co.] and AOL [A service sector co.]:

1. Perrier Mineral water purchased by Safeway for sale to its customers

2. Electricity used to provide lighting for a assembly line workers at a General
Electric refrigerator assembly plant.
3. Depreciation on AOL’s computer equipment used to up date directories of
web sites.
4. Electricity used to provide lighting for Safeway’s store aisles
5. Depreciation on GE’s computer equipment used for quality testing of
refrigerator components during the assembly process
6. Salaries of Safeway’s Marketing personnel planning local news paper
advertising campaigns.
7. Perrier Mineral water purchased by AOL for consumption by its Software
engineer’s
8. Salaries of AOL Marketing personnel selling banner advertising.

Required:
I.Distinguish between Manufacturing sector, Merchandising sector and service sector co’s
II. Distinguish between inventoriable cost and period cost
III. Classify each of the cost items [1-8] as inventoriable cost or period cost. Explain your
answers.

P5. Inventoriable Cost v/s Period costs Computation

During 20x1, ABC Inc. provides:

Production =10,000 units
Sales = 9,000 units @ Rs. 69/unit
Raw material consumed Rs. 90,000
Direct labour engaged 10,000 hours @ Rs. 10 per hour.
POH 50 % of labour, WIP: OP. Rs.10,000 and CLO: Rs.14,000, salaries Rs.92,000, depreciation
on office building Rs.13,000, marketing costs Rs. 15,000.

Required: Find inventoriable costs & period costs

CASE STUDY: Three Dog Bakery: Understanding cost terms

For Three Dog Bakery,” Going to the dogs “has been a good thing! Founded by Dandye and
Mark Beckloff in 1989 with little more than the desire to satisfy the finicky palate of their
beloved 114- pound, deaf Great Dane, the co has grown from a single store in Downtown
Kansas city, Missouri, to more than 30 world wide locations. Their dog treats are made from
wholesome ingredients such as flour, eggs, carrots, spinach, peanut butter, and carob and they
have clever names such as Snickerpoodles, Scottie Biscottis, Rollovers, Pup Tarts, and Great
Danish. Some of the treats are frosted with honey- yogurt icings and decorated with colorful,
edible flourishes. Special-occasions cakes, such as carrot cake or Carob chip, can be
personalized by an in-store pastry chef. More than a few customers have entered the bakery
stores to buy snacks before realizing the treats were for dogs, not people. In all, the co. makes
more than 125 different low-fat treats. Selling price ranges from a few cents for a small dog
biscuit to more than $20 for a special-order cake.

Three dog bakery has a 40000 Sq.ft centralized baking commissary in Downtown Kansas City
that prepares 70% of the goodies sold. Except for slower summer months the commissary runs
24 hours a day 7 days a week. Items consist of baked biscuits and carob-dipped goodies that
can pack and ship well. The commissary has one main assembly line which stations for mixing
ingredients, mechanized cutting of shapes, extruding doughnut-shaped biscuits, manual
placement of cut or extruded biscuits on baking sheets, baking ovens, cooling, manual care of
dipping[ for selected items], Hand packing into trays or containers, shrink wrapping, and
boxing. Most trays hold 12 specialty biscuits each and the pack by hand. There is also a
conveyer belt for the automatic packing of small biscuits into 7 ounce tubs employees are cross
trained to perform multiple assembly line functions and can work on every type of biscuit the
plant produces.

For the remaining 30% of finished goods, each store has specially out fitted kitchen that
prepares cakes, brownies, tarts and other delicate or frosted items. Pre package mixes, created
at the commissary, are use to assure consistent quality from store to store. Retail bakeries also
sell non edible pet items, such as collars, leashes, shampoo, logo T-shirts, hats and coffee
mugs. Some of the stores hold birthday parties and “Yappy hours” for in store dog socialization
customers do not have to come towards Three dog Bakery retail store to buy merchandise,
however the co. has a whimsical web site www.threedog.com]and a healthy mail order
business through its cat- oops!-Dogalog. PetsMart stores in the United states Three dog bakery
treats too. Sales are split evenly between the Three sales channels: Retail, direct to consumer
and wholesale.

Annual revenues exceed $20 mn for this privately held co. As for the pet Market itself, there
are more than 60 mn pet dogs in the United States, with nearly every owner buying anywhere
from one to 5 packages of treats per month, 2/3rd of pet owners gave their pet gifts, more than
half give Christmas presents and 25% give birthday gifts. Pet owners spend in excess of $20Bn
annually industry wide on animal product, food, and services. Owners who spend more than
$300 per year on their dogs tend to be younger, earn higher incomes, be married and have no
children.

Questions:
1. To what cost objects could three dog bakery trace its costs?
2. Classify the following cost items as direct[D] or Indirect [I] and fixed[F] or Variable[V]
with respect to the production department[ You will have two answers for each item (D
or I;F or V): Refer the following table
COST ITEM D I
F V F V
a. Salary of the production department manger to over sees
manufacturing
b. Salaries of founders Dan Dye and mark Beckloff
c. Card board trays used to package sets of 12 specialty biscuits
d. Salary of the graphic designer who prepares the Dogalog
illustrations and layout
e. Annual maintenance service agreement for the shrink- wrap
machine
f. Wages paid to assembly line workers who mix Snickerpoodle
ingredients in batches
g. Air conditioning costs for the entire baking commissary
h. Cost of floor, Eggs and carob icing for Rollover biscuits
3. The co produces its Dogalog on a quarterly basis and mails copies to customers on the
co’s mailing lists. Is the cost of producing and mailing the Dogalog considered and
inventoriable costs are a period cost? Why?
4. What sectors- Manufacturing, merchandising or service- does three dog bakery operate
in? Why are they classified this way?