Target Costing and Pricing Exercise 8: Lovebug Company has determined that its new automotive hood screen would gain widespread customer acceptance if the company could price it at or under $30. Anticipated labor hours and costs for each unit of the new product follow. Direct Materials Cost $5 Direct labor cost Manufacturing labor: Hours 0.2 Hourly labor rate $10 Assembly labor: Hours 0.5 Hourly labor rate $15 Machine hours 1 The company currently uses the following three activity-based cost rates: Machine handling $0.30 per dollar of direct materials Production $5.00 per machine hour Product delivery $0.50 per unit The company’s minimum desired profit is 40 percent over total production and delivery cost. Compute the target cost for the new hood screen, and determine if the company should market it (Round to two decimal places). Problem 5 Developing Transfer Prices Sand Company has two divisions, Glass Division and Instrument Division. For several years, Glass Division has manufactured a special glass container, which it sells to Instrument Division at the prevailing market price of $20. Glass Division produces the glass containers only for Instrument Division and does not sell the product to outside customers. Annual production and sales volume is 20,000 containers. A unit cost analysis for Glass Division follows. Cost Categories Costs per Container Direct Materials $3.50 Direct labor, 1/4 hour 2.3 Variable overhead 7.5 Avoidable fixed costs: $30,000/20,000 units 1.5 Corporate overhead: $3.60 per direct labor hour 4.5 Variable shipping costs 1.2 Unit Cost $20.50 Corporate overhead represents the allocated joint fixed costs of production- building depreciation, property taxes, insurance, and executives’ salaries. A profit markup of 20 percent is used to determine transfer prices. REQUIRED: What would the appropriate transfer price for Glass Division to use in billing its transactions with Instrument Division? If Glass Division decided to sell some containers to outside customers, would your answer to requirement 1 change? Defend your response. What factors concerning transfer price should management consider when transferring products between divisions? Exercise 4: Measures of Quality in a Service Business Rehab Health Care, LLC, incurred the service-related activity costs for the month that follow. Total sales $40,000 Customer complaint processing 1,000 Employee training 400 Reinspection and retesting 500 Design review of service procedures 300 Technical support 200 Investigation of service defects 800 Sample testing of vendors 100 Inspection of supplies 150 Quality audits 250 Quality-related downtime 300 Prepare an analysis of the costs of quality for Rehab Health Care. Categorize the costs as (a) costs of conformance, with subsets of prevention costs and appraisal costs, or (b) costs.

1. Target Costing and Pricing
Exercise 8:
Lovebug Company has determined that its new automotive
hood screen would gain widespread customer acceptance if the
company could price it at or under $30.
Anticipated labor hours and costs for each unit of the new
product follow.
Direct Materials Cost
$5
Direct labor cost
Manufacturing labor:

2. Hours
0.2
Hourly labor rate
$10
Assembly labor:
Hours
0.5
Hourly labor rate
$15

3. Machine hours
1
The company currently uses the following three activity-based
cost rates:
Machine handling
$0.30 per dollar of direct materials
Production
$5.00 per machine hour
Product delivery

4. $0.50 per unit
The company’s minimum desired profit is 40 percent over total
production and delivery cost.
Compute the target cost for the new hood screen, and determine
if the company should market it (Round to two decimal places).
Problem 5
Developing Transfer Prices
Sand Company has two divisions, Glass Division and
Instrument Division.
For several years, Glass Division has manufactured a special
glass container, which it sells to Instrument Division at the
prevailing market price of $20.
Glass Division produces the glass containers only for
Instrument Division and does not sell the product to outside
customers.
Annual production and sales volume is 20,000 containers.
A unit cost analysis for Glass Division follows.

5. Cost Categories
Costs per Container
Direct Materials
$3.50
Direct labor, 1/4 hour
2.3
Variable overhead
7.5
Avoidable fixed costs: $30,000/20,000 units
1.5

6. Corporate overhead: $3.60 per direct labor hour
4.5
Variable shipping costs
1.2
Unit Cost
$20.50
Corporate overhead represents the allocated joint fixed costs of
production- building depreciation, property taxes, insurance,
and executives’ salaries.
A profit markup of 20 percent is used to determine transfer
prices.
REQUIRED:
What would the appropriate transfer price for Glass Division to
use in billing its transactions with Instrument Division?
If Glass Division decided to sell some containers to outside
customers, would your answer to requirement 1 change?
Defend your response.

7. What factors concerning transfer price should management
consider when transferring products between divisions?
Exercise 4:
Measures of Quality in a Service Business
Rehab Health Care, LLC, incurred the service-related activity
costs for the month that follow.
Total sales
$40,000
Customer complaint processing
1,000
Employee training
400
Reinspection and retesting
500
Design review of service procedures
300
Technical support
200
Investigation of service defects
800
Sample testing of vendors
100
Inspection of supplies
150
Quality audits
250
Quality-related downtime
300
Prepare an analysis of the costs of quality for Rehab Health

8. Care.
Categorize the costs as (a) costs of conformance, with subsets
of prevention costs and appraisal costs, or (b) costs or
nonconformance, with subsets of internal failure costs and
external failure costs.
Compute the percentage of sales represented by prevention
costs, appraisal costs, total costs of conformance, internal
failure costs, external failure costs, total costs of
nonconformance, and total costs of quality.
Also compute the ratio of costs of conformance to total costs of
quality of costs of nonconformance to total costs of quality.
Exercise 9
: Measures of Production Performance
Analyze the following nonfinancial measures of quality for
Sweet Express, Inc., a supplier of novelty candy boxes, for a
recent four-week period.
Focus specifically on measures of production performance.
Measures of Quality
Week 1
Week 2
Week 3
Week 4
Percentage of defective products per million produced

9. 0.9%
0.7%
0.5%
0.4%
Equipment utilitization rate
89%
90%
89%
90%
Machine downtime (hours)
11
9
12
11
Machine maintenance time (hours)
9
8
8
9
Machine setup time (hours)
3
4
5
3
Problem 4: Interpreting Measures of Quality
Circuit Corporation supplies integrated circuitry to major
appliance manufacturers in all parts of the world.
Producing a high-quality product in each of the company’s four
divisions is the mission of management.

10. Each division is required to record and report its efforts to
achieve quality in all of its primary product lines.
The following information for the most recent three-month
period was submitted to the chief financial officer:
Macon Division
Dothan Division
Valdosta Division
Columbia Division
Amount
% of Rev
Amount
% of Rev
Amount
% of Rev
Amount
% of Rev
Costs of Conformance

11. Prevention Costs:
Quality training of employees
$4,400
$15,600
$23,600
$8,900
Process engineering
3,100
19,700
45,900
9,400
Preventive maintenance

12. 5,800
14,400
13,800
11,100
Total prevention costs
$13,300
0.95%
$49,700
3.11%
$83,300
5.55%
$29,400
1.73%
Appraisal costs:
End-of-process sampling and testing
$3,500
$19,500
$21,400
$6,900

13. Quality audits of products
6,100
11,900
17,600
8,700
Vendor Audits
4,100
10,100
9,800
7,300
Total appraisal costs
13,700
0.98%
$41,500
2.59%
$48,800
3.25%
22,900
1.35%
Total costs of conformance
27,000
1.93%
$91,200

14. 5.70%
$132,100
8.80%
$52,300
3.08%
Costs of Nonconformance
Internal failure costs:
Quality-related downtime
$26,800
$8,300
$6,500
$22,600
Scrap and rework
17,500

15. 9,100
7,800
16,200
Scrap disposal losses
31,200
7,200
3,600
19,900
Total internal failure costs
75,500
5.39%
$24,600
1.54%
$17,900
1.19%
$58,700
3.45%
External failure costs

16. Warranty claims
$22,600
$4,400
$2,500
$17,100
Customer complaint processing
31,600
8,100
6,400
22,300
Returned goods
29,900
5,600
3,100
19,800
Total external failure costs
$84,100
6.01%
$18,100
1.13%
12,000

17. 0.80%
59,200
3.48%
Total costs of nonconformance
$159,000
11.40%
$42,700
2.67%
$29,900
1.99%
$117,900
6.93%
Total costs of quality
$186,600
13.33%
$133,900
8.37%
$162,200
10.79%
$170,200
10.01%
Ratios of Nonfinancial Measures:
Number of sales to number of warranty claims
168 to 1
372 to 1

18. 996 to 1
225 to 1
Number of products produced to number of products reworked
1,420 to 1
3,257 to 1
6,430 to 1
2,140 to 1
Change in throughout time (positive amoun means time
reduction)
(-4.615%)
2.163%
5.600%
(-1.241%)
Total number of deliveries to number of late deliveries
86 to 1
168 to 1
290 to 1
128 to 1
REQUIRED:
Rank the divisions in order of their apparent product quality.

19. What three measures were most important in your rankings in 1?
Why?
Which division is most successful in its bid to improve quality?
What measures illustrate its high-quality rating?
Consider the two divisions producing the lowest-quality
products.
What actions would recommend to the management of each
division?
Where should their quality dollars be spent?