13-38 Pricing The price, contribution, and profit information is as follows. 1. $220.815 = $7,385,875 X 1.45 / 48,500 2. $229.

82 = $8,917,020 X 1.25 / 48,500 3. $253.81 = $152.286/ (1 - .4) 4. $245.141 = $183.856 / (1 - .25) 5. $252.980 = $183.856 X (1 + .37597) Where: .37597 = ($22,350,000X.15) / (48,500X$183.86)

Total Investment in Product Line Expected Sales (units) Total Variable Costs Total Fixed Costs Total Manufacturing Cost Total Selling and Administrative Total Life Cycle Cost Per unit Manufacturing Cost Per unit Life Cycle Cost

22,350,000 48,500 $ 5,535,650 3,381,370 7,385,875 1,531,145 8,917,020 $ 152.286 $ 183.856 Desired Rate for Markup 45% 25% 40.00% 25.00% 15% 37.597% = $ 4,680,000 + = 2,345,875 + = $ 4,680,000 + = 855,650 + = 7,385,875 + = 7,385,875 / = 7,385,875 + 855,650 675,495 + 2,345,875 675,495 1,531,145 48,500 1,531,145 / Contribution Margin* $ 5,173,878 5,610,669 6,774,184 6,353,737 6,733,880

360,000 360,000

48,500 Gross Margin* $ 3,323,653 3,760,444 4,923,959 4,503,512 4,883,655 Operating Profit $ 1,792,508 2,229,299 3,392,814 2,972,367 3,352,510

Method: Markup on full manufacturing cost Markup on life cycle costs Price to Achieve Desired GM % Price to Achieve Desired LCC % Price to Achieve Desired ROA of

Price 220.815 229.820 253.810 245.141 252.980

* uses roundup of price to 3 significant digits

6. The contribution margin, gross margin, and operating profit are shown in the right-hand portion of the table above. For example, $5,173,878 = $220.815 x 48,500 - $5,535,650

The pricing methods yield prices from $220.82 to $253.81 The next highest price, $252.98, has the advantage that it provides the desired return on investment, a more precise statement of the firms goal than in the other methods. On the other hand, the lower price might be an advantage if the firm is trying to achieve sales growth and is concerned about maintaining or improving market share during turns in the business cycle for its customers. This latter concern is especially important given that the demand for the firms product is a derived demand, and there is little that Williams can do to influence total auto sales.

13-42 Target Costing Using QFD 1. The calculations are shown below:
First: Customer Criteria and Ranking Importance 50 100 150 300 Relative Importance 16.7% 33.3% 50.0% 100.0%

Taste Comfort Enjoyment Total Second: Product Components and Cost

Cost Menu and Food Preparation Wait Staff Food Ingredients Total $ 8 12 6 26

Percent of Total 30.77% 46.15% 23.08% 100.00%

Third: Determine How Components Contribute to Customer Satisfaction Customer Criteria Comfort Enjoyment 30% 20% 50% 40% 60% 30% 30% 20% 20% 100% 100% 100%

Components Menu and Food Preparation Wait Staff Food Ingredients

Taste

Fourth: Determine Importance Index for Each Component Customer Criteria Components Taste Comfort Enjoyment Relative Importance of this criteria 16.7% 33.3% 50.0% Importance Relative The % contribution of each component to each customer criteria is: Index Cost Menu and Food Preparation 30% 20% 50% 36.67% 30.77% Spend more Wait Staff 40% 60% 30% 41.67% 46.15% Spend less Food Ingredients 30% 20% 20% 21.67% 23.08% Spend less 100% 100% 100% 100.00% 100.00%

2. The cost index for menu and food preparation is low relative to the importance index, which indicates that Rick should consider spending more time and cost on this activity. In contrast, the cost index for wait staff is somewhat higher than the importance index, which indicates that Rick should consider decreasing the resources applied to wait staff. Also, customer satisfaction does not appear to reward the level of expenditure for food ingredients; perhaps savings could be made here.

13-52 Theory of Constraints First, summarize key information and obtain hours capacity in each process. The materials cost for the table is $100 of lumber, while the materials cost for the sofa equals $250 ($75 for lumber and $175 for fabric).
Product Table Sofa Demand Price Materials Cost 400 $ 250 $ 100 150 450 250 Time Available 280 =2 staff x 35hr x 4 weeks 280 700 =175 x 4 280 = 2 workers x 35 x 4 140

Activity First Second Third Fourth Fifth

Time Required in hrs/unit Name Table Sofa Cut 0.50 0.2 Sand 0.50 0.5 Assemble 0.75 1.5 Stain 0.80 0.3 Cut Fabric 0.00 0.8

Second, identify the constraint. In this case the constraint is staining time, where there is a need for 85 more hours of capacity
Step Two, Part 1: Identify the Constraint Total Time Table Sofa Required (hrs) Cut .5x400=200 .2x150=30 230 Sand .5x400=200 .5x150=75 275 Assemble .75x400=300 1.5x150=225 525 Stain .8x400=320 .3x150=45 365 Cut Fabric 0 .8x150=120 120 Time Available 280 280 700 280 140 Slack Time 50 5 175 -85 20

Next, determine the most profitable product, as determined by the requirements of the staining operation. Since the sofa requires substantially less staining time, and because it has higher throughput, it is the most profitable product.
Step Two, Part 2: Identify Most Profitable Product Table Sofa Price $ 250.00 $ 450.00 Materials Cost 100.00 250.00 Throughput Margin $ 150.00 $ 200.00 Constraint time 0.8 0.3 Staining Time Throughput/time $ 187.50 $ 666.67 per hour

13-52 (continued -1)

Finally, determine the most profitable product mix. Since sofas are the most profitable through the staining constraint, we fill the sofa demand first, and then with the remaining staining capacity, fill as much of the table demand as possible. See below for calculations.
Step Two, Part 2: Identify Most Profitable Product Mix Tables Units of Product (see note) 293 Throughput/time $ 150 Total Throughput $ 43,950 Sofas $ $ 150 200 30,000 Total

73,950

Note: Sofas are most profitable and go first; total time for sofas = 150 x .3 = 45hrs; Total hours available for Tables = 280-45 = 235 hours; total tables that can be manufactured = 235/.8 = 293 tables.

2. Part one above solves the first two steps of the TOC, to identify the constraint and determine the most profitable product mix. The third step, to maximize flow through the constraint, would require Colton to look for ways to speed up the staining operation, by simplifying it, by training the operator, or other means. In the fourth TOC step, Colton could consider adding a part time employee to add capacity at the constraint, though it might be difficult to find a skilled employee who wanted part time work. Adding a full time employee would be unnecessary and wasteful, unless the motel contract works out. In the final TOC step, Colton should consider the possibility of re-design, by for example using a different type of stain that requires less time and skill. Also, Colton should consider maintaining a small amount of product inventory so that the unmet demand of product, at times (as for tables in this case) can be sold from inventory.