A+ Answers of the following Questions

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Target prices, target costs, value engineering, cost incurrence, locked-in costs, activity based costing.

Cutler Electronics makes a radio-cassette player, CE100, which has 80 components. Cutler sells 7,000 units each month for $70 each. The costs of manufacturing CE100 are $45 per unit, or $315,000 per month. Monthly manufacturing costs incurred are:

Direct material costs

$182,000

Direct manufacturing labor costs

$28,000

Machining Costs (fixed)

$31,500

Testing costs

$35,000

Rework Costs

$14,000

Ordering Costs

$3,360

Engineering Costs (fixed)

$21,140

Total manufacturing costs

$315,000

 

Cutler’s management identifies the activity cost pools, the cost driver for each activity, and the cost per unit of the cost driver for each overhead cost pool as follows:

Manufacturing

Activity

Description of

Activity

Cost Driver

Cost per Unit of

Cost Driver

1. Machining Costs

Machining components

Machine-hour capacity

$4.50 per machine-hour

2. Testing Costs

Testing components and final product (Each unit of CE100 is tested individually.)

Testing-hours

$2 per testing-hour

3. Rework Costs

Correcting and fixing errors and defects

Units of CE100 reworked

$20 per unit

4. Ordering Costs

Ordering of components

Number of orders

$21 per order

5. Engineering Costs

Designing and managing of products and processes

Engineering-hour capacity

$35 per engineering-hour

 

Cutler’s management views direct material costs and direct manufacturing labor costs as variable with respect to the units of CE100 manufactured. Over a long-run horizon, each of the overhead costs described in the preceding table varies, as described, with the chosen cost drivers.

               The following additional information describes the existing design:

               a. Testing and inspection time per unit is 2.5 hours.

               b. 10% of the CE100’s manufactured are reworked.

               c. Cutler places two orders with each component supplier each month. Each component is supplied by a different supplier.

               d. It currently takes 1 hour to manufacture each unit of CE100.

In response to competitive pressures, Cutler must reduce its price to $62 per unit and its costs by $8 per unit. No additional sales are anticipated at this lower price. However, Cutler stands to lose significant sales if it does not reduce its price. Manufacturing has been asked to reduce its costs by $6 per unit. Improvements in manufacturing efficiency are expected to yield a net savings of $1.50 per radio-cassette player, but that is not enough. The chief engineer has proposed a new modular design that reduces the number or components to 50 and also simplifies testing. The newly designed radio-cassette player, called “New CE100” will replace CE100.

               The expected effects of the new design are as follows:

a. Direct material costs for the New CE100 is expected to be lower by $2.20 per unit.

b. Direct manufacturing labor cost for the New CE100 is expected to be lower by $0.50 per unit.

c. Machining time required to manufacture the New CE100 is expected to be 20% less, but machine-hour capacity will not be reduced.

d. Time required for testing New CE100 is expected to be lower by 20%.

e. Rework is expected to decline to 4% of New CE100s manufactured.

f. Engineering-hours capacity will remain the same.

Assume that the cost per unit of each driver for CE100 continues to apply to New CE100.

1. Calculate Cutler’s manufacturing costs per unit of New CE100.

2. Will the new design achieve the per-unit costs-reduction targets that have been set for the manufacturing costs of New CE100? Show your calculations.

3. The problem describes two strategies to reduce costs: (a) improving manufacturing efficiency and (b) modifying product design. Which strategy has more impact on Cutler’s costs? Why? Explain briefly.

Lear, Inc., has $800,000 in current assets, $350,000 of which are considered permanent
current assets. In addition, the firm has $600,000 invested in fixed assets.

a. Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 10 percent. Short-term financing currently costs 5 percent. Lear’s earnings before interest and taxes are $200,000. Determine Lear’s earnings after taxes under this financing plan. The tax rate is 30 percent.

b. As an alternative, Lear might wish to finance all fixed assets and permanent current assets plus half of its temporary current assets with long-term financing.
The same interest rates apply as in part a. Earnings before interest and taxes will be $200,000. What will be Lear’s earnings after taxes? The tax rate is 30 percent.

c. What are some of the risks and cost considerations associated with each of these alternative financing strategies?

1. Poster Inc. owns 35 percent of Elliott Corporation. During the calendar year 2003, Elliott had net earnings of $300,000 and paid dividends of $36,000. Poster mistakenly accounted for the investment in Elliott using the cost method rather than the equity method of accounting. What effect would this have on the investment account and net income, respectively?

A. Understate, overstate

B. Overstate, understate

C. Overstate, overstate

D. Understate, understate

2. Marino Corporation purchased the following portfolio of trading securities during 2008 and reported the following balances at December 31, 2008. No sales occurred during 2008.

All declines are considered to be temporary.

Security                Cost                      Market Value at 12/31/08

X                            $ 80,000              $ 82,000

Y                            140,000               132,000

Z                            32,000 28,000

The only transaction in 2009 was the sale of security Z for $34,000 on December 31, 2009.

The market values for the other securities at December 31, 2009 were the same as at

December 31, 2008. Marino’s entry to record the sale of security Z would include

A. a credit of $2,000 to Realized Gain on Sale of Trading Securities.

B. a debit of $2,000 to Realized Gain on Sale of Trading Securities.

C. a $2,000 debit to Market Adjustment—Trading Securities.

D. a $4,000 debit to Market Adjustment—Trading Securities.

3. At the beginning of the year, a company had a debit balance in the account Market Adjustment—Trading Securities. During the year the company didn’t buy or sell any trading securities, but at the end of the year the related market adjustment account had a credit balance. This change indicates

A. a loss on the income statement was recognized.

B. a gain on the income statement was recognized.

C. the value of the investment account increased.

D. the value of the investment account decreased.

1. When an investor uses the cost method to account for investments in common stock, cash dividends received by the investor from the investee should normally be recorded as

A. a deduction from the investment account.

B. dividend revenue.

C. an addition to the investor’s share of the investee’s profit.

D. a deduction from the investor’s share of the investee’s profit.

2. The net assets of an entity

A. Investment by owners              

B. Distributions to owners            

C. Owners’ equity

D. Revenues

3. An increase in net assets through the issuance of stock

A. Investment by owners              

B. Distributions to owners            

C. Owners’ equity

D. Revenues

1. The payment of a dividend

A. Investment by owners              

B. Distributions to owners            

C. Owners’ equity

D. Revenues

2. Items offering future value to an entity

A. Investment by owners              

B. Distributions to owners            

C. Owners’ equity

D. Revenues

3. Edwards Company began business in February of 2007. During the year, Edwards purchased the three trading securities listed below. On its December 31, 2007, balance sheet, Edwards appropriately reported a $4,000 credit balance in its Market Adjustment— Trading Securities account. There was no change during 2008 in the composition of Edward’s portfolio of trading securities. Pertinent data are as follows:

Security                Cost                      Market Value December 31, 2008

A                            $120,000                            $126,000

B                                90,000                                 80,000

C                              160,000                              157,000

                             $370,000                             $363,000

What amount of loss on these securities should be included in Edward’s income statement for the year ended December 31, 2008?

A. $0                    

B. $3,000            

C. $7,000

 

D. $11,000

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