Jensen Company owns a building in a suburban industrial park. It purchased the building four years ago for $3 million. It is now deciding whether to lease the building or to use it as a distribution center. It could be leased immediately. Given today’s market conditions, lease income of $120,000 per year would be expected. To convert the building to make it useful as a distribution center would require an immediate expenditure of $400,000. Having the distribution center at this location would provide Jensen with $140,000 per year in cost savings, at today’s prices. The cash flows associated with this decision are not very risky, so a real discount rate of just 3% per year is required. Inflation of 2% per year is expected in the future. For simplicity, assume that: (i) there are no taxes, (ii) the building could be leased or used as a distribution center forever, (iii) ongoing cash flows, including rents and distribution cost savings, would increase with the overall inflation rate, and (iv) all cash flows except the initial $400,000 would occur at year end. (the last assumption implies that one year of inflation would affect the first lease payment and distribution cost saving) (a) Provide a NPV analysis and a recommendation of how the building should be used.(b) Is the outcome of your NPV analysis sensitive to changes in the assumed inflation rate?

​Sam's Cat Hotel operates 52 weeks per​ year, 6 days per​ week, and uses a continuous review inventory system. It purchases kitty litter for ​$11.00 per bag. The following information is available about these​ bags:

Demand=80 ​bags/week

Order cost=$55.00​/order

Annual holding cost=40 percent of cost

Desired ​cycle-service level=80 percent

Lead time=5 weeks ​(30 working​ days)

Standard deviation of weekly demand=15 bags

Current ​on-hand inventory is 320 ​bags, with no open orders or backorders.

a. Suppose that the weekly demand forecast of 80 bags is incorrect and actual demand averages only 55 bags per week. How much higher will total costs​ be, owing to the distorted EOQ caused by this forecast​ error?

The costs will be ​$___ higher owing to the error in EOQ. ​(Enter your response rounded to two decimal​ places.)

b. Suppose that actual demand is 50 bags but that ordering costs are cut to only $13.00 by using the internet to automate order placing. However, the buyer does not tell anyone, and the EOQ is not adjusted to reflect this reduction in S. How much higher will total costs be, compared to what they could if the EOQ were adjusted?

The costs will be $____ higher owing to the error EOQ.

Sam's Cat Hotel operates 52 weeks per​ year, 6 days per​ week, and uses a continuous review inventory system. It purchases kitty litter for ​$11.00 per bag. The following information is available about these​ bags:

Demand=80 ​bags/week

Order cost=$55.00​/order

Annual holding cost=40 percent of cost

Desired ​cycle-service level=80 percent

Lead time=5 weeks ​(30 working​ days)

Standard deviation of weekly demand=15 bags

Current ​on-hand inventory is 320 ​bags, with no open orders or backorders.

a. Suppose that the weekly demand forecast of 80 bags is incorrect and actual demand averages only 55 bags per week. How much higher will total costs​ be, owing to the distorted EOQ caused by this forecast​ error?

The costs will be ​$___ higher owing to the error in EOQ. ​(Enter your response rounded to two decimal​ places.)

b. Suppose that actual demand is 50 bags but that ordering costs are cut to only $13.00 by using the internet to automate order placing. However, the buyer does not tell anyone, and the EOQ is not adjusted to reflect this reduction in S. How much higher will total costs be, compared to what they could if the EOQ were adjusted?

The costs will be $____ higher owing to the error EOQ.

Mastery Problem: Activity-Based Costing (Advanced)

Activity-Based Costing

Traditionally, Overhead cost: Sometimes referred to as "factory overhead," this is an indirect cost that is not directly tied to the production of units, yet nonetheless must be built into product cost in order to appropriately price it. Examples are managerial salaries, rent expense, setup costs, and property taxes.overhead costs are assigned based arbitrarily on the rate of either Direct labor: This is a labor cost directly associated with the production of goods and services. An example is the hourly wages of workers.direct labor or Direct materials: This is a material cost directly associated with the production of goods. An example is sheet metal used to manufacture auto parts.direct materials associated with production. This makes sense when companies only make a few products, production processes are simple, and overhead costs are less pervasive. However, today production processes are more complex, companies make a wider array of products, and fewer costs are directly traceable to units of production. To address this, companies use activity-based costing (ABC).

Specifically, activity-based costing identifies and traces costs and expenses to activities and then to specific products. ABC uses multiple factory overhead rates based on activities. Activities are the types of work, or actions, involved in a manufacturing process or service activity. For example, assembly, inspection, and engineering design are activities.

The estimated activity costs are allocated to products using an activity rate. Activity rates are determined as follows:
Activity Rate = Estimated Activity Cost / Estimated Activity Base Usage

Comparing Two Products under Traditional and Activity-Based Costing

Compare two projects under development by the same company. The following are a few aspects of each product’s development process relevant to costs.

Traditional Costing

Traditional costing would take the proportion of a direct cost, such as direct labor hours, and use it as the basis for allocating overhead costs, such as computing power and testing. In the following table, use developer hours as the basis for assigning overhead costs (computing and developer costs) to each project. If required, round your answers to the nearest dollar.

Review the resources each product (S and T) requires for production and compare that to the costs calculated above under traditional costing. Does traditional costing serve as an accurate gauge of costs?
No

• Yes
• No
• Not enough information

Feedback

Using traditional cost assignment means pegging overhead costs based on a direct cost, such as direct labor or direct materials. In this case, you use direct labor (developer hours) as the basis for overhead allocation.

For product S, the percentage of developer labor costs as a proportion of the whole is already calculated. This is the figure that, when multiplied by the overhead values, will yield the overhead assigned to each project under traditional costing.

Activity-Based Costing

Using the data above for products S and T, calculate the costs using activity-based costing. Allocate the costs of testing, computing, and development based on the rates of activity consumed by each product's development process. If required in your computations, round per unit costs to the nearest cent. Round your final answers to the nearest dollar.

Feedback

The budgeted activity costs are assigned to products using factory overhead rates for each activity. These rates are called activity rates because they are related to activities. Activity rates are determined as follows:
Activity Rate = Budgeted Activity Cost / Total Activity Base Usage

The costs are allocated to the product by multiplying the activity-base usage by the computed activity rate.

Activity-based costing for varying batch production

A manufacturing company has the following two activities associated with completion of products:

1. The setting up of machines for running batches of products
2. The actual production of units produced

The company has annual manufacturing overhead costs of $2,000,000, of which $200,000 is directly involved in setting up machines for batch runs. During the year, the company expects to perform 400 machine setups, one setup per batch for a total of 400 batches of production. Assume that the batch sizes vary considerably, but the work involved in setting up the machines is not appreciably different from one job to the next.

If the company estimates that the $200,000 costs associated with setups will yield 400 setups this year, the cost associated directly with each setup will be $ per setup. Because each job will require its own setup, setup costs are viewed as batch costs. Because $200,000 of the $2,000,000 are costs associated with setups, this means that costs associated directly with the production of units equal $.

Feedback

The costs associated directly with the actual production of units will be annual manufacturing costs less the costs directly involved in setting up the machines for batch runs.

The costs directly associated with each setup will be costs directly involved

CASE STUDY

Miss Yinnary is one of the many women who own their own businesses and her experience is not very different from others, who must contend with being a mother, a spouse and a family cheerleader in addition to owning and operating a business. She is the owner of the famous Y-Hotel. It was her first business, though she had some family background in this business. Her two sisters were also in the same line of business. But she borrowed some money, put in some of her savings and started her own venture. She was the first woman ever to enter into this business, most of her clients could not understand that a woman could be interested in the hospitality industry. To Step up her game in the hospitality Industry , Miss Yinari is seeking someone who understands innovative entrepreneurship to assist her.

During her rise to success and in management of her hotel business, she also needs to manage a family, stay teaching in university and dealing with community affairs. In her mind, there is nothing more exhilarating than owning her own business, and for her, the fun is in facing the challenges of turning the hotel into a first ever hotel that provide customers an unforgettable experience with innovation

In the present time, more women are making this choice, pursuing entrepreneurship rather than staying as housewives or traditional careers. For the past few years, the number of women starting new ventures is three times as large as the number of men. There are several good reasons for this trend. Some women find that owning a business is the only way to combine a decent income with time for their children by having the flexibility to control their schedules. Others see themselves as unlikely corporate managers and recognizing the gender problem that exists for achieving success, they choose the entrepreneurial route. Still others see entrepreneurship as a way of controlling their lives, pursuing interests that would be impossible in a corporate job.

The dual roles of mother and entrepreneur often conflict, and husbands and wives

tend to develop separate career tracks that often cannot be reconciled. Women can

also find it lonely in a business world, especially if clients are predominantly men,

this was a problem for Yinari too.

Many women, however, have businesses that fit well with their interest and with

women customers. These include services in beauty care, nutrition, education,

entertainment etc. Nevertheless, being in business often exacts a double price for

women, yet for those with determination like Yinari, the rewards are always waiting.

Your Task as Business Consultant , Prepare a report regarding the following issues below :

1. As the innovate consultant how would you to plan this project to your client?

case study question

Miss Yinnary is one of the many women who own their own businesses and her experience is not very different from others, who must contend with being a mother, a spouse and a family cheerleader in addition to owning and operating a business. She is the owner of the famous Y-Hotel. It was her first business, though she had some family background in this business. Her two sisters were also in the same line of business. But she borrowed some money, put in some of her savings and started her own venture. She was the first woman ever to enter into this business, most of her clients could not understand that a woman could be interested in the hospitality industry. To Step up her game in the hospitality Industry , Miss Yinari is seeking someone who understands innovative entrepreneurship to assist her.

During her rise to success and in management of her hotel business, she also needs to manage a family, stay teaching in university and dealing with community affairs. In her mind, there is nothing more exhilarating than owning her own business, and for her, the fun is in facing the challenges of turning the hotel into a first ever hotel that provide customers an unforgettable experience with innovation

In the present time, more women are making this choice, pursuing entrepreneurship rather than staying as housewives or traditional careers. For the past few years, the number of women starting new ventures is three times as large as the number of men. There are several good reasons for this trend. Some women find that owning a business is the only way to combine a decent income with time for their children by having the flexibility to control their schedules. Others see themselves as unlikely corporate managers and recognizing the gender problem that exists for achieving success, they choose the entrepreneurial route. Still others see entrepreneurship as a way of controlling their lives, pursuing interests that would be impossible in a corporate job.

The dual roles of mother and entrepreneur often conflict, and husbands and wives

tend to develop separate career tracks that often cannot be reconciled. Women can

also find it lonely in a business world, especially if clients are predominantly men,

this was a problem for Yinari too.

Many women, however, have businesses that fit well with their interest and with

women customers. These include services in beauty care, nutrition, education,

entertainment etc. Nevertheless, being in business often exacts a double price for

women, yet for those with determination like Yinari, the rewards are always waiting.

Your Task as Business Consultant , Prepare a report regarding the following issues below :

J.As Innovative Consultant how would you plan this project for your client?

CASE STUDY QUESTION

Miss Yinnary is one of the many women who own their own businesses and her experience is not very different from others, who must contend with being a mother, a spouse and a family cheerleader in addition to owning and operating a business. She is the owner of the famous Y-Hotel. It was her first business, though she had some family background in this business. Her two sisters were also in the same line of business. But she borrowed some money, put in some of her savings and started her own venture. She was the first woman ever to enter into this business, most of her clients could not understand that a woman could be interested in the hospitality industry. To Step up her game in the hospitality Industry , Miss Yinari is seeking someone who understands innovative entrepreneurship to assist her.

During her rise to success and in management of her hotel business, she also needs to manage a family, stay teaching in university and dealing with community affairs.

In her mind, there is nothing more exhilarating than owning her own business, and for her, the fun is in facing the challenges of turning the hotel into a first ever hotel that provide customers an unforgettable experience with innovation

In the present time, more women are making this choice, pursuing entrepreneurship rather than staying as housewives or traditional careers. For the past few years, the number of women starting new ventures is three times as large as the number of men. There are several good reasons for this trend. Some women find that owning a business is the only way to combine a decent income with time for their children by having the flexibility to control their schedules. Others see themselves as unlikely corporate managers and recognizing the gender problem that exists for achieving success, they choose the entrepreneurial route. Still others see entrepreneurship as a way of controlling their lives, pursuing interests that would be impossible in a corporate job.

The dual roles of mother and entrepreneur often conflict, and husbands and wives

tend to develop separate career tracks that often cannot be reconciled. Women can

also find it lonely in a business world, especially if clients are predominantly men,

this was a problem for Yinari too.

Many women, however, have businesses that fit well with their interest and with

women customers. These include services in beauty care, nutrition, education,

entertainment etc. Nevertheless, being in business often exacts a double price for

women, yet for those with determination like Yinari, the rewards are always waiting.

Your Task as Business Consultant , Prepare a report regarding the following issues below :

- Analyze why many women nowadays prefer to become an entrepreneur rather than pursue their career path ?

Warehouse Location - The FMC Corporation*

The FMC Corporation is a large diversified producer of machinery, chemicals, films, and fibers such as nylon. The company has annual sales which place it in the top hundred corporations in the nation. The study presented in this case was done for FMC's Link-Belt Products Division, manufacturers of a broad line of industrial equipment. The study was done by FMC's own consultants, people who are available to work with any of the company's divisions.

A few years before the beginning of this study, Link-Belt management began to feel that perhaps it should reduce the number of warehouses. This feeling was based on several factors, including the decrease in transportation time necessary to reach customers, the lower cost of communication services, higher labor costs, and improvements in techniques of automating warehouses.

The company had warehouses in Philadelphia; Atlanta; Columbus, Ohio; Chicago; Kansas City; Dallas; Reno; Seattle; Houston; and Portland, Oregon. The question presented by the Link-Belt management to the consultants: Should any of the current warehouses be closed, and, in general, what possible configuration of warehouse sites would provide the lowest possible cost while still providing good service to customers?

Dollar amounts reflecting total warehouse sales, tonnages handled, and total operating costs are considered confidential by FMC. However, in the most recent year for which an analysis of figures could be made, the percentage breakdown for Link-Belt's warehouse operating costs were as follows: 19% for freight, 42% for inventory investment, and 39% for operating expenses.

To begin the analysis, 17 additional cities were selected as potential warehouse sites. Since construction and land costs vary from city to city, it was necessary to develop for each city an equation which represented the local costs of construction. In developing this equation, we shall use the following variable.

A = warehouse floor area (in thousands of square feet)
Cc = cost of labor and materials to build a warehouse (in thousands of dollars)
L = amount of land needed for warehouse (in acres)
C1 = cost of land (in thousands of dollars)
I = inventory in a warehouse at a given time (in pounds)
T = total quantity of merchandise going through a warehouse in a year (in thousands of pounds)
For example, if A represents the warehouse area in thousands of square feet, and Cc represents the cost of labor and materials in thousands of dollars, then

Cc = 12.5 + 3.75A
was found to provide a good approximation to the cost for labor and materials in Atlanta, while

Cc = 18.75 + 5.6A
is a similar equation for Chicago. These equations were obtained by studying construction costs in the cities in question.

Land prices also vary from city to city. Again using information obtained about each of the cities in question, it was estimated that the amount of land, L, in acres, needed for a warehouse of area A, in thousands of square feet, is given by

L = 0.875 + 0.0315A.
For Chicago, the cost of this land, C1, in thousands of dollars, is given by A, in thousands of square feet, is given by

C1 = 30.6 + 1.10A,
while the cost equation for Atlanta is

C1 = 14.8 + 0.94A.
Based on past records, the company knows that one square foot of warehouse area can store about 70 pounds of merchandise, or, if I represents inventory measured in pounds in a warehouse at a given time, then

I = 70A.
The inventory at a given time, again from experience, is also given by

I = 180 + 0.1435T,
where T is the total weight of merchandise in thousands of pounds that go through the warehouse in a year.

Using the above equations, we can find the cost of land, labor, and materials for a new warehouse in Chicago in terms of T—that is, we can find the cost in terms of the quantity of merchandise going through the warehouse in a year. To find the cost for labor and materials, we begin with

Cc = 18.75 + 5.6A,
and since I = 70A, or A = I/70, we get

We also know that I = 180 + 0.1435T; thus

which simplifies to

Cc = 33.15 + 0.0115T.
To find the cost of land, go through the same steps to obtain

C1 = 33.47 + 0.00225T
for the equation which gives the cost of land for a warehouse in Chicago.

Using these equations, the analysts prepared the following chart.

Cost of a Warehouse in Chicago   Fixed Cost   Variable cost (dollars per 1000 pounds)
Labor, materials   $33,000   $11.50
Land   $33,500   $2.25
Total   $66,500   $13.75
The numbers in this chart were obtained as follows. We know that the cost of land in Chicago is given by C1 = 33.47 + 0.00225T. The fixed cost is found by letting T = 0: C1 = 33.47 + 0.00225(0) = 33.47, which represents a fixed cost of about $33,500. The variable cost is given by 0.00225 thousands of dollars, which is about $2.25 per thousand pounds of merchandise.

Charts similar to the one above could be made for each of the other cities under discussion. Using all these results, and a process called linear programming, the analysts recommended the following consolidation of warehouse sites. All warehousing should be centralized in five warehouses, located in Philadelphia, Atlanta, Indianapolis, Dallas, and San Francisco. Operating from these five cities will save $600,000 annually, with an additional $730,000 to be realized from selling the warehouses which would be closed. The analysts estimated that service to customers would be as follows: it would be possible to reach eighty-seven percent of the market from these five warehouses in two days or less (compared to current delivery times of one day or less for 89% of all customers), with the remaining 13% reached in three days. About half the market will have delivery times of one day or less.

Exercises

1.  
Complete each of the following steps.

(a)   Cost of labor and materials in Atlanta:
Cc = ____________________.
(b)   Since A = I/70 and I = 180 + 0.01435T, we have

(c)   The equation for the cost of land in Atlanta is
Cl = ______________________________________.
(d)   We have

2.  
Complete the following chart.

Cost of a Warehouse in Atlanta   Fixed Cost   Variable cost
Labor, materials        
Land        
Total        

3.  
Suppose the cost equations for a Sacramento warehouse can be given by

Cc = 11.4 + 4.20A,
C1 = 12.9 + 0.90A.
(a)  
Obtain Cc and C1 in terms of T. (Hint: Go through the steps of Exercise 1 above.)

(b)  
Complete a table, similar to the one of Exercise 2, for a warehouse in Sacramento.

4.  
Show that warehouse area A, in thousands of square feet, needed for a certain annual total quantity of goods, T, in thousands of pounds, is given by

    A = 2.57 + 0.00205T,     
or   T = 487A - 1250.

Samsung manufactures cellular phones at a processing cost of $203 per unit.

Currently, the company produces an average of 2002 phones per day, 85 percent of which are good-quality phones, resulting in 15 percent defective phones, 62 percent of which can be reworked. The cost of reworking a defective phone is $73.

They also consider a quality improvement initiative: They can replace a plastic component with a metal one which increases the initial cost of processing phone to $211, but the percentage of defective items decreases to 11 percent. With this quality improvement option, nothing else would be different from the current situation (for example the cost of rework and the percentage of defectives that can be reworked stay the same).

Calculate the followings:

1. Number of units reworked daily with current situation
2. Daily product yield with current situation
3. Effective production cost per unit with current situation
4. With the current situation, if the company wants the yield to be 2000, how many phones they should process daily?
5. Number of units reworked daily with suggested quality improvement option
6. Daily product yield with suggested quality improvement option
7. Effective production cost per with suggested quality improvement option
8. Should Samsung should take the suggested quality improvement initiative?
   1. Yes
   2. No

Jarvene Corporation uses the FIFO method in its process costing system. The following data are for the most recent month of operations in one of the company’s processing departments:

The cost of beginning inventory according to the company’s costing system was $7,833 of which $4,865 was for materials and the remainder was for conversion cost. The costs added during the month amounted to $177,160. The costs per equivalent unit for the month were:

Required:

1. Compute the total cost per equivalent unit for the month.

2. Compute the equivalent units of material and conversion in the ending inventory.

3. Compute the equivalent units of material and conversion that were required to complete the beginning inventory.

4. Compute the number of units started and completed during the month.

5. Compute the cost of ending work in process inventory for materials, conversion, and in total for the month.

6. Compute the cost of the units transferred to the next department for materials, conversion, and in total for the month.

4,5,6 are willing to fixed, thx