6-29. 1. Increase in costs fr year assuming DryPool used New Dye: Units to dye Cost differential ($1-$.

20) per ounce x 3 ounces Increase in costs 60,000 x $2.40 $144,000

Since the fine is only $102,000, they would be financially better off by not switching. 1. If DryPool switches to the new dye, costs will increase by $144,000. If DryPool implements kaizen costing, costs will be reduced as follows: Original monthly costs Input Fabric Labor Total
*

Unit cost $6 $3

Number of units 6,000* 6,000*

Total cost $36,000 $18,000 $54,000

Annual cost $432,000 $216,000 $648,000 $613,523

(12,000 + 60,000)/12 months = 6,000 units

Monthly decrease in costs Fabric Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Labor cost Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12

$36,000 35,640 35,284 34,931 34,581 34,235 33,893 33,554 33,218 32,886 32,557 32,231 $409,010

$18,000 17,820 17,642 17,466 17,291 17,118 16,947 16,778 16,610 16,444 16,280 16,117 $204,513

TOTAL Difference between costs with and without Kaizen improvements This means costs increase a net ($144,000 34,477) = $109,523

$34,477

Since DryPool would otherwise have to spend $102,000 to pay the fine, their net costs would only be $7,523 higher than if they did not switch to the new dye or implement kaizen costing.

3. Reduction in materials can be accomplished by reducing waste and scrap. Reduction in direct labor can be accomplished by improving the efficiency of operations and decreasing down time. Employees who make and dye the T-shirts may have suggestions for ways to do their jobs more efficiently. For instance, employees may recommend process changes that reduce idle time, setup time, and scrap. To motivate workers to improve efficiency, many companies have set up programs that share productivity gains with the workers. DryPool must be careful that productivity improvements and cost reductions do not in any way compromise product quality. 6-31. Easecom Company - Budgeted Income Statement for 2012 Revenues Equipment ($6,000 1.06 1.10) Maintenance contracts ($1,800 1.06) Total revenues Cost of goods sold ($4,600 1.03 1.06) Gross margin Operating costs: Marketing costs ($600 + $250) Distribution costs ($150 1.06) Customer maintenance costs ($1,000 + $130) Administrative costs Total operating costs Operating income 7-18. 1. Variance Analysis for Bank Management Printers for September 2012 Level 1 Analysis Actual Static-Budget Results Variances (1) (2) = (1) (3) 12,000 3,000 U a $252,000 $48,000 U d 84,000 36,000 F 168,000 12,000 U 150,000 5,000 U $ 18,000 $17,000 U Static Budget (3) 15,000 c $300,000 f 120,000 180,000 145,000 $ 35,000 (in thousands) $6,996 1,908 $8,904 5,022 3,882 850 159 1,130 900 3,039 $ 843

Units sold Revenue Variable costs Contribution margin Fixed costs Operating income

$17,000 U Total static-budget variance

2.

Level 2 Analysis
FlexibleActual Budget Results Variances (1) (2) = (1) (3) 12,000 0 a $12,000 F $252,000 d 84,000 12,000 F 168,000 24,000 F 150,000 5,000 U $ 18,000 $19,000 F Sales Flexible Volume Static Budget Variances Budget (3) (4) = (3) (5) (5) 12,000 3,000 U 15,000 b c $60,000 U $300,000 $240,000 e f 96,000 24,000 F 120,000 144,000 36,000 U 180,000 145,000 0 145,000 $ (1,000) $36,000 U $ 35,000

Units sold Revenue Variable costs Contribution margin Fixed costs Operating income

12,000 $21 = $252,000 b 12,000 $20 = $240,000 c 15,000 $20 = $300,000

d e

$19,000 F $36,000 U Total flexible-budget Total sales-volume variance variance $17,000 U Total static-budget variance

12,000 $7 = $ 84,000 12,000 $8 = $ 96,000 f 15,000 $8 = $120,000

3. Level 2 analysis breaks down the static-budget variance into a flexible-budget variance and a sales-volume variance. The primary reason for the static-budget variance being unfavorable ($17,000 U) is the reduction in unit volume from the budgeted 15,000 to an actual 12,000. One explanation for this reduction is the increase in selling price from a budgeted $20 to an actual $21. Operating management was able to reduce variable costs by $12,000 relative to the flexible budget. This reduction could be a sign of efficient management. Alternatively, it could be due to using lower quality materials (which in turn adversely affected unit volume).