External Linkages, Activity-Based Costing, and Strategic Decision Making

Problem 11.26

1. ● management has no indication of the profitability of

various customer groups because there is no cost assigned to customers.

● knowing the sources of profitability can affect customer mix and product mix decisions.

● It can also have a significant effect on deciding which customer segments to serve.

2. Average order-filling cost per unit produced = 300,000/126,000,000 units

= $0.05/unit 6%-10% of SP

Activity rate = $6,300,000/140,000 orders = $45 per order

Family A Family B Family C

Activity Rate $ 45 $ 45 $ 45

Ave. Order Size 600 1,000 1,500

Ordering Cost/Unit $ 0.075 $ 0.045 $ 0.030(9%-15% of SP) (3%-6% of SP)(5%-9% of SP)

3.Orders = [(600 × 70,000) + (1,000 × 42,000) + (1,500 × 28,000)]/2,000 = 63,000

Reduction in orders = 140,000 – 63,000 = 77,000

Steps to be reduced = 77,000/2,000 = 39

Initial steps = 140,000/2,000 = 70

Step-fixed costs ($70,000 × 38) $ 2,660,000 Variable activity costs ($28 × 77,000) 2,156,000 Reduction in Resource spending $ 4,816,000

3. (continued)● Increased in order size by smaller customers● Demand of order-filling activity for larger orders

decreased● Demand for scheduling, setups and handling are also

decreased

4.● seek help from the buyer so that Moss can become

more of a lean manufacturer if Moss is a JIT supplier.● seek long-term contracts to reduce some of the

ordering costs so that smaller orders can be supplied.

5.● Because of decreased cost in producing and selling the

bolts, Moss can increase customer value by providing:○ a lower price○ some extra product features without increasing the

price

Focused Value Streams, Product Costing

Problem 15.22

1.

Pizza Root Beer Salads

90 90 60

210 60 -

300/10 slices30 pizzas

150/5 glasses30 pitchers

60

60 bowls

Light Eaters

Heavy Eaters

Number of Orders

2.

● Average Cost = $510/60 = $8.50

Pizza Root Beer Salads

Number of Orders 30 30 60

Price per Unit $ 10 $ 3 $ 2

TOTAL $ 300 $ 90 $ 120 $ 510

3.

Pizza Root Beer Salads Pizza Root Beer Salads

No. of Orders 9 pizzas 18 pitchers 30 bowls 21 pizzas 12 pitchers 30 bowls

Price/Unit $ 10 $ 3 $ 2 $ 10 $ 3 $ 2

TOTAL $ 90 $ 54 $ 60 $ 210 $ 36 $ 60

Group BGroup A

Average Cost$ 204/30 = $ 6.80

Average Cost$ 306/30 = $ 10.20

3. (continued)

groups = value streams placing customers into groups = placing products in value streams

assigning all related costs = assignment and dedication of resources cost per lunch per customer = cost per unit of product produced