Case Study: Program Value-Added Nonvalue-Added Gray

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Register to read the introduction… Program Value-Added Nonvalue-Added Gray
Area
(a) Quality improvement programs to
• reduce rework costs by 40% (0.40  $90,000)
• reduce expediting costs by 40% (0.40  $65,000)
• reduce materials and labor costs by
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(0.40  $33,000 = $13,200) as nonvalue-added
Effect on value-added and nonvalue-added costs

–$ 19,800
–$ 19,800

–$ 13,200
–$ 13,200

–$ 9,000

– 24,000
– 33,000

+ 33,000
$ 0
(c) Maintenance programs to
• increase preventive maintenance costs by 70% (0.70  $55,000)
• decrease breakdown maintenance costs by 50% (0.50  $75,000)
Total effect
Transferring 60% of gray area costs (0.60  $38,500 = $23,100) as value-added and 40% (0.40  $38,500 = $15,400) as nonvalue-added
Effect on value-added and nonvalue-added costs

+$ 23,100
+$ 23,100

–$ 37,500
– 37,500

+ 15,400
–$ 22,100

+$38,500

+ 38,500

– 38,500
$ 0
Total effect of all programs
Value-added and nonvalue-added costs calculated in requirement 2
Expected value-added and nonvalue-added costs as a result of implementing these programs –$ 51,700

1,208,000

$1,156,300 –$ 97,300
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What is the target operating income?
2. What is the selling price Zoom-o-licious needs to charge to earn the target operating income? Calculate the markup percentage on full cost.
3. Zoom-o-licious’s closest competitor has just increased its candy case price to $16, although it sells 36 candy bars per case. Zoom-o-licious is considering increasing its selling price to $15 per case. Assuming production and sales decrease by 4%, calculate Zoom-o-licious’ return on investment. Is increasing the selling price a good idea?

13-31 Cost-plus and market-based pricing.

Quick Test Laboratories evaluates the reaction of materials to extreme increases in temperature. Much of the company’s early growth was attributable to government contracts, but recent growth has come from expansion into commercial markets. Two types of testing at Quick Test are Heat Testing (HTT) and Arctic-Condition Testing (ACT). Currently, all of the budgeted operating costs are collected in a single overhead pool. All of the estimated testing-hours are also collected in a single pool. One rate per test-hour is used for both types of testing. This hourly rate is marked up by 30% to recover administrative costs and taxes and to earn a

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