PROBLEM 12-46 (35 MINUTES)

1. Segmented income statement:

Piedmont
Novelties
Sales revenue.
Variable operating expenses:
Cost of goods sold
Sales commissions
Total...
Segment contribution margin.
Less: Fixed expenses controllable by
segment manager:
Local advertising
Sales manager salary
Total...
Profit margin controllable by segment
manager
Less: Fixed expenses traceable to
segment, but controllable by
others:
Local property taxes..
Store manager salaries.
Other..
Total...
Segment profit margin..
Less: Common fixed expenses.
Net income...

Raleigh

Charlotte

Savannah

$720,000

$200,000

$240,000

$280,000

$470,000
36,000
$506,000
$214,000

$100,000
10,000
$110,000
$ 90,000

$150,000
12,000
$162,000
$ 78,000

$220,000
14,000
$234,000
$ 46,000

$ 12,100
5,000
$ 17,100

$ 1,600
$ 1,600

$ 3,300
---$ 3,300

$ 7,200
5,000
$ 12,200

$196,900

$ 88,400

$ 74,700

$ 33,800

$ 1,800
16,000
4,000
$ 21,800
$175,100
121,100
$ 54,000

600
4,500
900
$ 6,000
$ 82,400

300
6,000
700
$ 7,000
$ 67,700

900
5,500
2,400
$ 8,800
$ 25,000

Supporting calculations:
Sales revenue: Raleigh, 10,000 units x $20.00; Charlotte, 15,000 units
x $16.00; Savannah, 20,000 units x $14.00
Cost of goods sold: Raleigh, 10,000 units x $10.00; Charlotte, 15,000
units x $10.00; Savannah, 20,000 units x $11.00
Sales commissions: Raleigh, $200,000 x 5%; Charlotte, $240,000 x 5%;
Savannah, $280,000 x 5%
2. Savannah is the weakest segment because of several factors:
Raleigh and Charlotte have much higher markups on cost [100% ($10.00/$10.00)
and 60% ($6.00/$10.00), respectively]. However, Savannahs markup is only 27%
($3.00/ $11.00).

 Despite being the only store that has a sales manager, and spending
considerably more on advertising than Raleigh and Charlotte, Savannah has the
lowest gross dollar sales of the three stores. Savannahs return on these outlays
appears inadequate.
Savannahs other noncontrollable costs are much higher than those of Raleigh
and Charlotte.
3. Piedmont Novelties uses a responsibility accounting system, meaning that managers
and centers are evaluated on the basis of items under their control. Since this is a
personnel-type decision, the decision should be made by reviewing the profit margin
controllable by the store (i.e., segment) manager. The segment contribution margin
excludes fixed costs under a store managers control; in contrast, a stores segment
profit margin would reflect all traceable costs whether controllable or not.
EXERCISE 13-32 (15 MINUTES)
The weighted-average cost of capital (WACC) is defined as follows:

After-axcostMarket Costf Market

ofdebt valueequity value
eightd-W averg capitl ofdebt capitlofequity
costf
M
a
r
k
e
t
M
a
r
k
e
t
capitl
value value
ofdebt ofequity
The interest rate on Golden Gate Construction Associates $90 million of debt is 10 percent,
and the companys tax rate is 40 percent. Therefore, Golden Gates after-tax cost of debt is
6 percent [10% (1 40%)]. The cost of Golden Gates equity capital is 15 percent.
Moreover, the market value of the companys equity is $135 million. The following
calculation shows that Golden Gates WACC is 11.4 percent.

Weighted - average
cost of capital

(.06)($90,000,000) (.15)($135,000,000)
.114
$90,000,000 $135,000,000

EXERCISE 13-33 (20 MINUTES)

The economic value added (EVA) is defined as follows:

Economic
Investment center' s

value

after - tax

added
operating income

Investment
Weighted - average
Investment
center' s

center' s

cost of
total assets

current
liabilitie
s
capital

For Golden Gate Construction Associates, we have the following calculations of each
divisions EVA.

Division
Real Estate
Construction

After-Tax
Operating
Income
(in millions)

Current
Liabilities
(in millions)

Total Assets
(in millions)

Economic
Value
Added
(in millions)

WACC

$30(1.40)

$150

$9

.114

$1.926

$27(1.40)

$ 90

$6

.114

$6.624

EXERCISE 13-34 (10 MINUTES)

1.

Transfer price

outlay
cost

= $450*

opportunity
cost

$120

$570

*Outlay cost = unit variable production cost

Opportunity cost

= forgone contribution margin

= $570 $450 = $120

2.

If the Fabrication Division has excess capacity, there is no opportunity cost associated
with a transfer. Therefore:
Transfer price

outlay
cost +

= $450
PROBLEM 13-47 (40 MINUTES)
1.

a.

Transfer price

opportunity
cost
0

$450

= outlay cost + opportunity cost

= $1,300 + $300 = $1,600

b.

Transfer price

= standard variable cost + (10%)(standard variable cost)

= $1,300 + (10%) ($1,300) = $1,430

Note that the Frame Division manager would refuse to transfer at this price.
2.

a.

Transfer price

= outlay cost + opportunity cost

= $1,300 +$0 = $1,300

b.

When there is no excess capacity, the opportunity cost is the forgone

contribution margin on an external sale when a frame is transferred to the Glass
Division. The contribution margin equals $300 ($1,600 $1,300). When there is
excess capacity in the Frame Division, there is no opportunity cost associated
with a transfer.

c.

Fixed overhead per frame (130%)($400) = $520

Transfer price

= variable cost + fixed overhead per frame

+ (10%)(variable cost + fixed overhead per frame)
= $300 + $520 + [(10%)($1,300 + $520)]
= $2,002

d.

Incremental revenue per window..................................

Incremental cost per window, for Weathermaster
Window Company:
Direct material (Frame Division)...............................
Direct labor (Frame Division)....................................
Variable overhead (Frame Division)..........................
Direct material (Glass Division)................................
Direct labor (Glass Division).....................................
Variable overhead (Glass Division)...........................
Total variable (incremental) cost...............................

$3,100
$300
400
600
600
300
600

Incremental contribution per window in special order

for Weathermaster Window Company.......................

2,800
$ 300

The special order should be accepted because the incremental revenue exceeds
the incremental cost, for Weathermaster Window Company as a whole.
e.

Incremental revenue per window..................................

Incremental cost per window, for the Glass Division:
Transfer price for frame [from requirement 2(c)].....
Direct material (Glass Division)................................
Direct labor (Glass Division).....................................
Variable overhead (Glass Division)...........................

$ 3,100
$2,002
600
300
600

Total incremental cost................................................

Incremental loss per window in special order
for Glass Division........................................................

3,502
$ (402)

The Glass Division manager has an incentive to reject the special order because
the Glass Division's reported net income would be reduced by $402 for every
window in the order.
f.

3.

One can raise an ethical issue here to the effect that a division manager should
always strive to act in the best interests of the whole company, even if that action
seemingly conflicts with the divisions best interests. In complex transfer pricing
situations, however, it is not always as clear what the companys optimal action is
as it is in this rather simple scenario.

The use of a transfer price based on the Frame Division's full cost has caused a cost
that is a fixed cost for the entire company to be viewed as a variable cost in the Glass
Division. This distortion of the firm's true cost behavior has resulted in an incentive for
a dysfunctional decision by the Glass Division manager.

PROBLEM 13-48 (40 MINUTES)

1.

Among the reasons transfer prices based on total actual costs are not appropriate as a
divisional performance measure are the following:
They provide little incentive for the selling division to control manufacturing costs,
because all costs incurred will be passed on to the buying division.
They often lead to suboptimal decisions for the company as a whole, because they
can obscure cost behavior. Costs that are fixed for the company as a whole can be
made to appear variable to the division buying the transferred goods.

2.

Using the market price as the transfer price, the contribution margin for both the
Mining Division and the Metals Division is calculated as follows:

Mining
Division
Selling price.............................................................................

Metals
Division

2,700

$ 4,500

Less: Variable costs:

Direct material..............................................................
Direct labor...................................................................
Manufacturing overhead.............................................
Transfer price...............................................................
Unit contribution margin.........................................................
Volume......................................................................................

$
x

360
480
672*

1,188
1,000

180
225
2,700
$
795
x 1,000

Total contribution margin........................................................

$1,188,000

$795,000

*Variable overhead = $960 x 70% = $672

Variable overhead = $750 x 30% = $225

Note: the $150 variable selling cost that the Mining Division would incur for sales on the
open market should not be included, because this is an internal transfer.
3.

If RIRC instituted the use of a negotiated transfer price that also permitted the
divisions to buy and sell on the open market, the price range for toldine that would
be acceptable to both divisions would be determined as follows.
The Mining Division would like to sell to the Metals Division for the same price it can
obtain on the outside market, $2,700 per unit. However, Mining would be willing to
sell the toldine for $2,550 per unit, because the $150 variable selling cost would be
avoided.
The Metals Division would like to continue paying the bargain price of $1,980 per
unit. However, if Mining does not sell to Metals, Metals would be forced to pay
$2,700 on the open market. Therefore, Metals would be satisfied to receive a price
concession from Mining equal to the costs that Mining would avoid by selling
internally. Therefore, a negotiated transfer price for toldine between $2,550 and
$2,700 would be acceptable to both divisions and benefits the company as a whole.

4.

General transfer-pricing rule:

Transfer price =
outlay cost
+ opportunity cost
= ($360 + $480 + $672)* + ($1,188 - $150)**
=
$1,512
+ $1,038
= $2,550

*Outlay cost = direct material + direct labor + variable overhead [see requirement (2)]
**Opportunity cost = forgone contribution margin from outside sale on open market
= $1,188 contribution margin from internal sale calculated in
requirement (2), less the additional $150 variable selling cost
incurred for an external sale
Therefore, the general rule yields a minimum acceptable transfer price to the Mining
Division of $2,550, which is consistent with the conclusion in requirement (3).
5.

A negotiated transfer price is probably the most likely to elicit desirable management
behavior, because it will do the following:
Encourage the management of the Mining Division to be more conscious of cost
control.
Benefit the Metals Division by providing toldine at a lower cost than that of its
competitors.

Provide the basis for a more realistic measure of divisional performance.

EXERCISE 14-39 (15 MINUTES)

1.

The relevant cost of the theolite to be used in producing the special order is the
21,750p sales value that the company will forgo if it uses the chemical. This is an
example of an opportunity cost.
p denotes Argentinas peso.

2.

(a) 21,750p sales value: Discussed in requirement (1).

(b) 24,000p book value (8,000 kilograms 3p per kilogram): Irrelevant, since the
book value is a sunk cost.
(c) 28,800p current purchase cost (8,000 kilograms 3.60p per kilogram): Irrelevant,
since the company will not be buying any theolite.

EXERCISE 14-41 (10 MINUTES)

The most profitable product is the one that yields the highest contribution margin per unit
of the scarce resource, which is direct labor. We do not know the amount of direct-labor
time required per unit of either product, but we do know that Beta requires six times as
much direct labor per unit as Alpha. Define an arbitrary time period for which direct laborers
earn $1.00, and call this a time unit. The two products contribution margins per time
unit are calculated as follows:
Unit contribution margin .....................................................
Time units required per unit of product .........................
Contribution margin per time unit
Alpha: ($9.00 3) .............................................................
Beta: ($36.00 18) ...........................................................

Alpha
$9.00
3

Beta
$36.00
18

$3.00
$2.00

Therefore, Alpha is a more profitable product. Any arbitrary amount of direct labor
time expended on Alpha production will result in a greater contribution margin than an
equivalent amount of labor time spent on Beta production.
PROBLEM 14-44 (25 MINUTES)
1.

Contemporary Trends will be worse off by $6,400 if it discontinues wallpaper sales.

Sales..
Less: Variable costs.
Contribution margin.

Paint and
Supplies

Carpeting

$1,900,000
1,140,000
$ 760,000

$2,300,000
1,610,000
$ 690,000

Wallpaper
$ 700,000
560,000
$ 140,000

If wallpaper is closed, then:

Loss of wallpaper contribution margin...... $(140,000)
Remodeling..
(62,000)
Added profitability from carpet sales*.
325,000
Fixed cost savings ($225,000 x 40%)
90,000
Decreased contribution margin from paint
and supplies ($760,000 x 20%)...
(152,000)
Increased advertising (125,000)
Income (loss) from closure..... $ (64,000)
* The current contribution margin ratio for carpeting is 30% ($690,000
$2,300,000). This ratio will increase to 35%, producing a new contribution
for the line of $1,015,000 [($2,300,000 + $600,000) x 35%]. The end result is
that carpetings contribution margin will rise by $325,000 ($1,015,000 $690,000), boosting firm profitability by the same amount.
2.

This cost should be ignored. The inventory cost is sunk (i.e., a past cost that is not
relevant to the decision). Regardless of whether the department is closed,
Contemporary Trends will have a wallpaper inventory of $118,500.

3.

The Internet- and magazine-based firms likely have several advantages:

These companies probably carry little or no inventory. When a customer places
an order, the firm simply calls its supplier and acquires the goods. The result
may be lower expenditures for storage and warehousing.
These firms do not need retail space for walk-in customers.
Internet- and magazine-based firms can conduct business globally.
Contemporary Trends, on the other hand, is confined to a single store in
Baltimore.

PROBLEM 14-45 (50 MINUTES)

1.

Sets result in a 20% increase, or 1,500 dresses (1,250 1.20 = 1,500).

Complete sets..................................
Dress and accessory cape..............
Dress and handbag.........................
Dress only........................................
Total units if additional items are
introduced......................................
Less: Unit sales if additional items
are not introduced.........................
Incremental sales............................
Incremental contribution margin
per unit (excluding material and
cutting costs).................................
Total incremental contribution
margin.............................................

Percent
of Total Dresses
70%
1,050
6%
90
15%
225
9% 135
100%

Total Number of
Accessory
Capes
Handbags
1,050
1,050
90
225

1,500

1,140

1,275

1,250
250

-1,140

--
1,275

$192.00
$48,000

Additional costs:
Additional cutting cost
(1,500 91% $14.40)................
Additional material cost
(250 $80.00)...............................
Lost remnant sales
[(1,250 135) $8.00].................
Incremental cutting for
extra dresses (250 $32.00).......
Incremental profit............................

2.

$12.80
$14,592

Total

$4.80
$6,120

$68,712

$19,656
20,000
8,920
8,000

56,576
$12,136

Qualitative factors that could influence the companys management team in its
decision to manufacture matching accessory capes and handbags include:
accuracy of forecasted increase in dress sales.
accuracy of forecasted product mix.
company image of a dress manufacturer versus a more extensive supplier of
womens apparel.

 competition from other manufacturers of womens apparel.

whether there is adequate capacity (labor, facilities, storage, etc.).
PROBLEM 14-46 (25 MINUTES)
1.
Food
Blender Processor
Unit cost if purchased from an outside supplier .......................................
$60
$114
Incremental unit cost if manufactured:
Direct material ..........................................................................................
$18
$ 33
Direct labor ...............................................................................................
12
27
Variable overhead
$48 $30 per hour fixed ......................................................................
18
$96 (2)($30 per hour fixed) ................................................................
36
Total ......................................................................................................
$48
$ 96
Unit cost savings if manufactured .............................................................
$12
$ 18
Machine hours required per unit ................................................................
1
2
Cost savings per machine hour if manufactured
$12 1 hour .............................................................................................
$12
$18 2 hours ............................................................................................
$ 9
Therefore, each machine hour devoted to the production of blenders saves the company
more than a machine hour devoted to food processor production.
Machine hours available .....................................................................................
Machine hours needed to manufacture 20,000 blenders .................................

50,000
20,000

Remaining machine hours .................................................................................

30,000

Number of food processors to be produced (30,000 2) ................................

15,000

Conclusion: Manufacture
Manufacture
Purchase
2.

20,000 blenders
15,000 food processors
13,000 food processors

If the companys management team is able to reduce the direct material cost per
food processor to $18 ($15 less than previously assumed), then the cost savings
from manufacturing a food processor are $33 per unit ($18 savings computed in
requirement (1) plus $15 reduction in material cost):

New unit cost savings if manufactured ..........................................

Machine hours required per unit ....................................................
Cost savings per machine hour if manufactured
$12 1 hour .................................................................................
$33 2 hours ................................................................................

Food
Blender Processor
$12.00
$33.00
1 MH 2 MH
$12.00
$16.50

Therefore, devote all 50,000 hours to the production of 25,000 food processors.
Conclusion:

Manufacture: 25,000 food processors

Purchase: 3,000 food processors and 20,000 blenders

PROBLEM14-47 (25 MINUTES)

1.

2.

3.

Incremental unit cost if purchased:

Purchase price .........................................................................................
Material handling .....................................................................................
Total ..........................................................................................................

$ 90,000
18,000
$ 108,000

Incremental unit cost if manufactured:

Direct material ..........................................................................................
Material handling .....................................................................................
Direct labor ...............................................................................................
Variable manufacturing overhead ($72,000 1/3) .................................
Total ..........................................................................................................
Increase in unit cost if purchased ($108,000 $79,200) ...........................

$ 6,000
1,200
48,000
24,000
$ 79,200
$ 28,800

Increase in monthly cost of acquiring part RM67 if purchased

(10 $28,800, as computed above) ..........................................................
Less: rental revenue from idle space .........................................................
Increase in monthly cost .............................................................................

$288,000
150,000
$ 138,000

Contribution forgone by not manufacturing alternative product .............

Less: Savings in the cost of acquiring RM67
(10 $28,800 as computed in requirement 1) .........................................
Net cost of using limited capacity to produce part RM67 .........................

$312,000
288,000
$ 24,000

PROBLEM 14-51 (25 MINUTES)

Yes, the order should be accepted because it generates a profit of $110,000 for the firm.
Note: The fixed administrative cost is irrelevant to the decision, because this cost
will be incurred regardless of whether Mercury accepts or rejects the order.
Selling
price...............
Less: Direct material ($164 - $42)..........
Direct labor
Variable manufacturing overhead
(1 hour x $15.00*)
Unit contribution margin...
Total contribution margin (10,000 units x $133)...
Less: Additional setup costs..
Special device..
Net contribution to profit.

$315
$122
45
15

182
$133
$1,330,000

$740,000
480,000

1,220,000
$ 110,000

* Fixed manufacturing overhead: $1,500,000 60,000

machine hours = $25.00 per hour
Variable manufacturing overhead: $40.00 - $25.00 =
$15.00
No, Mercury lacks adequate machine capacity to manufacture the entire order.
Planned machine hours (5,000 hours x 6 months) 30,000
Current usage (30,000 hours x 80%).. 24,000
Available hours 6,000
Required machine hours (10,000 units x 1 hour)..
Options include the following:

10,000

Sacrificing some current business in the hope that a long-term relationship with
Venus can be established and proves to be profitable
Acquiring more machine capacity
Outsourcing some units
Working overtime

PROBLEM 15-41 (25 MINUTES)

1.

The manufacturing overhead rate is $27.00 per direct-labor hour, and the product
cost includes $13.50 of manufacturing overhead per pressure valve. Accordingly, the
direct-labor hours per finished valve is 1/2 hour ($13.50 $27.00). Therefore, 30,000
units per month would require 15,000 direct-labor hours.

2.

The analysis of accepting the Glasgow Industries order of 120,000 units is as

follows:
Totals for
Per Unit 120,000 Units
Incremental revenue ............................................................... $28.50
$3,420,000
Incremental costs:
Variable costs:
Direct material ................................................................. $7.50
Direct labor ......................................................................
9.00
Variable overhead ........................................................... 4.50
Total variable costs ..................................................... $21.00

$ 900,000
1,080,000
540,000
$2,520,000

Fixed overhead:
Supervisory and clerical costs
(4 months @ $18,000) .......................................................
Total incremental costs ..........................................................
Total incremental profit ..........................................................

72,000
$2,592,000
$ 828,000

The following costs are irrelevant to the analysis:

Shipping
Sales commission
Fixed manufacturing overhead (both traceable and allocated)
3.

The minimum unit price that Wolverine Valve and Fitting Company could accept
without reducing net income must cover the variable unit cost plus the additional
fixed costs.
Variable unit cost:
Direct material ..................................................................... $ 7.50
Direct labor ..........................................................................
9.00
Variable overhead ............................................................... 4.50
Additional fixed cost ($72,000 120,000) .............................
Minimum unit price .................................................................

$21.00
.60
$21.60

4.

Wolverines management should consider the following factors before accepting the
Glasgow Industries order:
The effect of the special order on Wolverines sales at regular prices.
The possibility of future sales to Glasgow Industries and the effects of
participating in the international marketplace.
The companys relevant range of activity and whether or not the special order will
cause volume to exceed this range.
The effect on machinery or the scheduled maintenance of equipment.
Other possible production orders that could come in and require the capacity
allocated to the Glasgow job.

PROBLEM 15-42 (30 MINUTES)

1.

Cost-plus pricing begins by computing an items cost and then adds an appropriate
markup. The result is the items selling price. In contrast, target costing begins by
determining an appropriate selling price. A target profit is next subtracted from that
price to yield the cost (i.e., the target cost) that must be achieved.
Target costing could be labeled price-led costing because it begins by determining a
target selling price. In contrast, cost-plus pricing methods begin with the cost and
culminate in determination of the selling price.

2.

The current selling price is $6,750:

Direct material.......
Direct labor.
Manufacturing overhead
Selling and administrative expenses.
Total cost.
Markup ($5,400 x 25%)...
Selling price......

3.

$ 900
2,250
1,500
750
$5,400
1,350
$6,750

Lehighs markup is $1,350, which is 20% of the current $6,750 selling price ($1,350
$6,750). To achieve a 20% markup on a $5,500 selling price, the company must
reduce its costs by $1,000.
Selling price.
Less: 20% markup ($5,500 x 20%).
Target cost

$5,500
1,100
$4,400

Current cost.
Less: Target cost..
Required cost reduction.

$5,400
4,400
$1,000

4.

Yes. The company should focus its efforts on trimming non-value-added costs.
These costs are associated with non-value-added activities (i.e., activities that are
either (a) unnecessary and dispensable or (b) necessary, but inefficient and
improvable).

5.

If costs cannot be reduced below $5,400, Lehigh will have to reduce its markup to
remain competitive. Assuming a desire to achieve the going market price of $5,500,
the markup must equal $100 ($5,500 - $5,400), or 1.85% of cost ($100 $5,400).
Given that the current markup on cost is 25%, a reduction of 23.15% is needed
(25.00% - 1.85%).

6.

The statement means that selling prices are a function of market conditions;
however, the selling prices must cover a companys costs in the long run. Also, in a
number of industries, prices are based on costs. Yet, the prices are subject to the
reaction of customers and competitors.
PROBLEM 15-43 (30 MINUTES)
1.

The minimum price per blanket that Detroit Synthetic Fibers, Inc. could bid without
reducing the companys net income is $48 calculated as follows:
Raw material (6 lbs. @ $3.00 per lb.) .........................................................
Direct labor (.25 hrs. @ $14.00 per hr.) .....................................................
Machine time ($20.00 per blanket) ............................................................
Variable overhead (.25 hrs. @ $6.00 per hr.) .............................................
Administrative costs ($5,000 1,000) .......................................................
Minimum bid price ..................................................................................

2.

$18.00
3.50
20.00
1.50
5.00
$48.00

Using the full cost criteria and the maximum allowable return specified, Detroit
Synthetic Fibers, Inc.s bid price per blanket would be $59.80 calculated as follows:
Relevant costs from requirement (1) ........................................................
Fixed overhead (.25 hrs. @ $16.00 per hr.) ...............................................
Subtotal ...................................................................................................
Allowable return (.15 $52.00) .................................................................
Bid price ..................................................................................................

$48.00
4.00
$52.00
7.80
$59.80

3.

Factors that management should consider before deciding whether to submit a bid
at the maximum acceptable price of $50 per blanket include the following:
The company should be sure there is sufficient excess capacity to fill the order
and that no additional investment is necessary in facilities or equipment that
would increase fixed costs.
If the order is accepted at $50 per blanket, there will be a $2 contribution per
blanket to cover fixed costs. However, the company should consider whether
there are other jobs that would make a greater contribution.
Acceptance of the order at a low price could cause problems with current
customers who might demand a similar pricing arrangement.

PROBLEM 15-44 (25 MINUTES)

1.

Target costing is more appropriate. MSC is limited in terms of what price it can
charge due to market conditions. A cost-plus-markup approach will use the desired
markup for the company; however, the resulting price may too high and not
competitive. In such an environment it makes more sense to use target costing,
which begins with the price to be charged and works backward to determine the
allowable cost.

2.

Target profit = asset investment x rate of return

= $27,000,000 x 12%
= $3,240,000

3.

Revenue = target profit + variable cost + fixed cost

= $3,240,000 + (25,000 hours x $33) + $2,850,000
= $6,915,000
Since total revenue must equal $6,915,000, the revenue per hour must be $276.60
($6,915,000 25,000 hours).

4.

Target profit = asset investment x rate of return

= $27,000,000 x 14%
= $3,780,000
Revenue = target profit + variable cost + fixed cost
= $3,780,000 + (25,000 hours x $33) + $2,850,000
= $7,455,000

No. A 14% return requires that MSC generate revenue per service hour of $298.20
($7,455,000 25,000 hours), which is clearly in excess of the $265 market price.
5.

To achieve a 14% return and a $265 revenue-per-hour figure, the company must trim
its costs. MSC could use value engineering, a technique that utilizes information
collected about a services design and associated production process. The goal is
to examine the design and process and then identify improvements that would
produce cost savings