WRAP UP SESSION

(TOPICS AFTER THE MID-TERM SESSION)

QUESTION 1 – RELEVANT COSTING

Zebra Drug Corporation buys three chemicals that are processed to produce two
types of analgesics used as ingredients for popular over-the-counter drugs. The
purchased chemicals are blended for two to three hours and then heated for 15
minutes. The results of the process are two separate analgesics, depryl and
pencol, which are sent to a drying room until their moisture content is reduced
to 6 to 8%. For every 1,300 pounds of chemical used, 600 pounds of depryl and
600 pounds of pencol are produced. After drying, depryl and pencol are sold to
companies that process into their final forms. The selling price are $12 per
pound for depryl and $30 per pound for pencol.
The cost to produce 600 pound of each analgesic are as follows :
Chemical $8,500
Direct labor $6,375
Overhead $9,900

The analgesics are packaged in 20-pound bag and shipped. The cost for each bag
is $1.30; shipping cost is $0.10 per pound.
Zebra could process depryl further by grinding it into a fine powder and then
molding the powder into tablet. The tablets can be sold directly to retail drug
stores as a generic brand. If this route were taken, the revenue received per
bottle of tablets would be $4.00 with 10 bottled produced by every pound of
depryl. The costs of grinding and tableting total $2.50 per pound of depryl.
Bottles cost $0.40 each. Bottles are shipped in boxes that hold 25 bottles at a
shipping cost of $1.60 per box.

Required :
1. Should Zebra sell depryl at split-off, or should depryl be processed and sold
as a tablet?
2. If Zebra normally sells 265,000 pound of depryl per year, what will be the
difference in profits if depryil is processed further?

QUESTION 2 – CAPITAL INVESTMENT DECISION

Each of the following scenarios is independent. Assume that all cash flow are
after-tax cash flow
a. Southward manufacturing is considering the purchase of a new welding
system. The cash benefits will be $400,000 per year. The system costs
$2,250,000 and will last 10 years
b. Rahn booth invested $1,300,000 in a project that pays him an even amount
per year for 5 years. The payback period is 2.5 years
c. Kylee Sorensen has just invested $1,400,000 in a new biomedical technology.
She expects to receive the following cash flow over the next 5 years :
$350,000, $490,000, $700,000, $420,000, and $280,000
d. Skiba Company is thinking about two different modifications to its current
manufacturing process. Skiba cost of capital is 10%. The after-tax cash flow
associated with the two investments are follow :

Year Project I (in US $) Project II (in US $)

0 (100,000) (100.000)
1 - 63,857
2 134,560 63,857

Required :
1. Compute the NPV for Soutward manufacturing, assuming a discount rate
of 12%. Should the company buy the new welding system?
2. How much cash does Rahn received each year?
3. What is the payback period for Kylee?
4. Compute the NPV and IRR for each project of Skiba

QUESTION 3 – QUALITY COST AND PRODUCTIVITY

At the end of 2013, Emery manufacturing began to focus on its quality costs. As a
first step, it identified the following costs in its accounting records a being
quality related :
2013
Sales (50,000 units @ $60) 3,000,000
Scrap 90,000
Rework 120,000
Training program 36,000
Consumer complaints 60,000
Warranty 120,000
Test labor 90,000
Inspection labor 75,000
Supplier evaluation 9.000

Required :
1. Prepare a quality cost report by quality cost category
2. Calculate the relative distribution percentage of each quality cost category.
Comment on the distribution
3. Using the Taguchi quality loss function, an average loss per unit is computed
at $5. What are the hidden cost of external failure? How does this affect the
relative distribution? What effect will the hidden-cost information have on a
quality improvement program?

QUESTION 4 – LEAN ACCOUNTING, TARGET COSTING AND BSC

At the end of 2010, Everett Company implemented a low-cost strategy to
improve its competitive position. Its objective was to become the low-cost
producer in its industry and enhance its profitability. To lower costs, Everett
undertook a number od lean improvement activities. Everett also adopted a
balanced score-card approach for its strategic performance management system.
Now, after two years of operation, the president of Everett wants some
assessment of the system’s achievements. To help provide this assessment, the
following information on one product has been gathered.
2010 2011
Theoretical annual capacity a 192,000 192,000
Actual production and sales b 152,000 176,000
Production hours available (40 workers) 80,000 80,000
Postpurchase cost per unit (in US $) 20 10
Scrap (pounds) 20,000 16,000
Materials used (pounds) 200,000 200,000
Actual cost per unit (in US $) 250 200
Days of inventory 6 3
Number of defective units 9,000 4,000
Suggestions per employee 2 6
Hours of training 200 800
Selling price per unit (in US $) 300 280
Number of new customers c 4,000 16,000
Market share (in percentage) d 20% ?

a Amount that could be produced given the available production hours

b Amount that was produced given the available production hours
c The increase of total sales from 2008 and 2009 all came as a result of new
customers. In 2008, the new customers were responsible for sales of 4,000
units
d The total market increased by 20,000 units from 2008 to 2009

Required :
1. Compute the following measures for 2010 and 2011
i) Theoretical velocity and cycle time
ii) Actual velocity and cycle time
iii) Percentage change in postpurchase cost (for 2011 only)
iv) Labor productivity (outputs/hours)
v) Scrap as a percentage of total material issues
vi) Percentage change in actual product cost (for 2011 only)
vii) Percentage change in days of inventory (for 2011 only)
viii) Defective units as a percentage of total units produced
ix) New customers per unit of output
x) Hours of training
xi) Selling price per unit (as given)
xii) Total employee suggestion
xiii) Market share
xiv) Percentage change in sales revenue
2. For the measure listed in Requirement 1, list likely strategic objective and
their associated measured, classified according to four Balanced Scorecard
perspectives. Evaluate the success of the strategy