Concept explainers
Strategic initiatives and CSR
Blue Skies Inc. is a retail gardening company that is piloting a new strategic initiative aimed at increasing gross profit. Currently, the company’s gross profit is 25% of sales, and its target gross profit percentage is 30%. The company’s current monthly sales revenue is $600,000.
The new initiative being piloted is to produce goods in-house instead of buying them from wholesale suppliers. Its in-house production process has two procedures. The makeup of the costs of production for Procedure 1 is 40% direct labor, 45% direct materials, and 15% overhead. The makeup of the costs of production for Procedure 2 is 60% direct labor, 30% direct materials, and 10% overhead. Assume that Procedure 1 costs twice as much as Procedure 2.
Instructions
Determine what the cost of labor, materials, and overhead for both Procedures 1 and 2 would need to be for the company to meet its target gross profit.
The company’s actual labor cost is $114,000 for Procedure 1. Determine the actual cost of direct labor, direct materials, and overhead for each procedure, and the total cost of production for each procedure.
The company is planning a CSR initiative to recycle the indirect materials used in production during Procedure 1. The company is paid for any of the indirect materials it recycles, and it applies the income from these payments as a direct offset to the cost of the direct materials. These indirect materials normally make up 70% of the overhead cost for Procedure 1. Determine what the maximum new cost (net of recycling revenues) of these indirect materials could be for Procedure 1 if this CSR initiative were to enable the company to meet its target gross profit percentage without changing any other costs.
a.
Identify the cost of labor, material and overhead required by Company B to meet the target gross profit with the existing sales level for Procedure 1 and Procedure 2.
Explanation of Solution
Strategic Initiatives: Strategic initiatives refer to the process implemented by the organization to attain those goals which it aims at achieving in the given period or in a long run.
Compute the cost makeup for Procedure 1 and Procedure 2:
Target gross profit percentage – 30% of sales
Total cost of production percentage – 70% of sales
Particulars | Amount ($) |
Total sales | $600,000 |
Multiply: Total cost of production percentage | |
Total cost of production | $420,000 |
Table (1)
Total cost of production is $420,000.
Compute the value of Cost of Procedure 2:
Compute the value of Cost of Procedure 1:
Compute the Cost makeup of Procedure 1:
Particulars | Amount ($) |
Labor (40%) | $112,000 |
Materials (45%) | $126,000 |
Overhead (15%) | $42,000 |
Total cost of production | $280,000 |
Table (2)
The Cost makeup of Procedure 1 is $280,000.
Compute the Cost makeup of Procedure 2:
Particulars | Amount ($) |
Labor (60%) | $84,000 |
Materials (30%) | $42,000 |
Overhead (10%) | $14,000 |
Total cost of production | $140,000 |
Table (3)
The Cost makeup of Procedure 2 is $140,000.
b.
Identify the cost of direct labor, direct material and overhead for Procedure 1 and Procedure 2.
Explanation of Solution
Compute the Labor Cost of Procedure 1:
Compute the value of Cost of Procedure 2:
Compute the Cost makeup of Procedure 1:
Particulars | Amount ($) |
Labor (40%) | $114,000 |
Materials (45%) | $128,250 |
Overhead (15%) | $42,750 |
Total cost of production | $285,000 |
Table (2)
The Cost makeup of Procedure 1 is $285,000.
Compute the Cost makeup of Procedure 2:
Particulars | Amount ($) |
Labor (60%) | $85,500 |
Materials (30%) | $42,750 |
Overhead (10%) | $14,250 |
Total cost of production | $142,500 |
Table (3)
The Cost makeup of Procedure 2 is $142,500.
c.
Identify the maximum new cost for the indirect materials for Procedure 1.
Explanation of Solution
Compute the maximum new cost for the indirect materials for Procedure 1:
Particulars | Amount ($) |
Current total cost of production | $ 427,500 |
Less: Target total cost of production | |
P1 materials cost savings needed | $ 7,500 |
Current P1 overhead materials cost | $ 29,925 |
Less: P1 overhead materials cost savings needed | |
Maximum new cost of P1 overhead materials | $ 22,425 |
Table (6)
The maximum new cost for the indirect materials for Procedure 1 is $22,425.
Want to see more full solutions like this?
Chapter 14 Solutions
Managerial Accounting
- Strategic Initiatives and CSR Blue Skies Inc. is a retail gardening company that is piloting a new strategic initiative aimed at increasing gross profit. Currently, the company’s gross profit is 25% of sales, and its target gross profit percentage is 30%. The company’s current monthly sales revenue is $480,000. The new initiative being piloted is to produce goods in-house instead of buying them from wholesale suppliers. Its in-house production process has two procedures. The makeup of the costs of production for Procedure 1 is 40% direct labor, 45% direct materials, and 15% overhead. The makeup of the costs of production for Procedure 2 is 60% direct labor, 30% direct materials, and 10% overhead. Assume that Procedure 1 costs twice as much as Procedure 2. 1. Determine what the cost of labor, materials, and overhead for both Procedures 1 and 2 would need to be for the company to meet its target gross profit. Cost makeup of Procedure 1: Direct Labor $fill in the blank 1 Direct…arrow_forwardStrategic initiatives and CSR Blue Skies Inc. is a retail gardening company that is piloting a new strategic initiative aimed at increasing gross profit. Currently, the company's gross profit is 25% of sales, and its target gross profit percentage is 30%. The company's current monthly sales revenue is $510,000. The new initiative being piloted is to produce goods in-house instead of buying them from wholesale suppliers. Its in-house production process has two procedures. The makeup of the costs of production for Procedure 1 is 40% direct labor, 45% direct materials, and 15% overhead. The makeup of the costs of production for Procedure 2 is 50% direct labor, 25% direct materials, and 25% overhead. Assume that Procedure 1 costs twice as much as Procedure 2. Required: 1. Determine what the cost of labor, materials, and overhead for both Procedures 1 and 2 would need to be for the company to meet its target gross profit. Cost makeup of Procedure 1: Direct Labor Direct Materials Overhead…arrow_forwardQuest Motors, Inc., operates as a decentralized multidivision company. The Vivo division of Quest Motors purchases most of its airbags from the airbag division. The airbag division’s incremental cost for manufacturing the airbags is $90 per unit. The airbag division is currently working at 80% of capacity. The current market price of the airbags is $125 per unit. Q. Using the general guideline presented in the chapter, what is the minimum price at which the airbag division would sell airbags to the Vivo division?arrow_forward
- Vice President for Sales and Marketing at Waterways Corporation is planning for production needs to meet sales demand in the coming year. He is also trying to determine how the company's profits might be increased in the coming year. This problem asks you to use cost-volume-profit concepts to help Waterways understand contribution margins of some of its products and decide whether to mass-produce any of them. Waterways markets a simple water control and timer that it mass-produces, Last year, the company sold 630,000 units at an average unit selling price of $4.40. The variable costs were $1,663,200, and the fixed costs were $742,896. Show Transcribed Text Margin of safety in dollars What is the margin of safety, both in dollars and as a ratio? (Round ratio to 0 decimal places, e.g. 25%.) Margin of safety ratio 3 $ Ć %arrow_forwardVice President for Sales and Marketing at Waterways Corporation is planning for production needs to meet sales demand in the coming year. He is also trying to determine how the company's profits might be increased in the coming year. This problem asks you to use cost-volume-profit concepts to help Waterways understand contribution margins of some of its products and decide whether to mass-produce any of them. Waterways markets a simple water control and timer that it mass-produces. Last year, the company sold 735,000 units at an average unit selling price of $3.60. The variable costs were $1,852,200, and the fixed costs were $508,032.arrow_forwardGreen Manufacturing is a traditional manufacturing company located in the midwestern United States. The company's operations manager is developing a strategy to become more CSR-oriented. In an effort to evaluate possible areas where CSR initiatives can be implemented, the manager has gathered the following data regarding three potential CSR activities: Initial Added Cost Variable Cost Variable Savings Recycle and reuse production materials $ 5,000 $0.10 per lb. of recycled material $0.15 per lb. of recycled material Add solar panels as a source of power 700,000 $ 1,000 per year $ 33,000 per year Replace assembly room light fixtures with natural light 120,000 $ 180 per month $ 220 per month The recycling activity would carry on indefinitely. The solar panels would have a useful life of 30 years. The replacement of assembly room light fixtures with natural light is assumed to have an 80-year effect. a. Identify which CSR activities Green Manufacturing should…arrow_forward
- Green Manufacturing is a traditional manufacturing company located in the midwestern United States. The company's operations manager is developing a strategy to become more CSR-oriented. In an effort to evaluate possible areas where CSR initiatives can be implemented, the manager has gathered the following data regarding three potential CSR activities: Initial Added Cost Variable Cost Variable Savings Recycle and reuse production materials $ 5,000 $0.10 per lb. of recycled material $0.15 per lb. of recycled material Add solar panels as a source of power 700,000 $ 1,000 per year $ 33,000 per year Replace assembly room light fixtures with natural light 120,000 $ 180 per month $ 220 per month The recycling activity would carry on indefinitely. The solar panels would have a useful life of 30 years. The replacement of assembly room light fixtures with natural light is assumed to have an 80-year effect. a. Identify which CSR activities Green Manufacturing should…arrow_forwardQuest Motors, Inc., operates as a decentralized multidivision company. The Vivo division of Quest Motors purchases most of its airbags from the airbag division. The airbag division’s incremental cost for manufacturing the airbags is $90 per unit. The airbag division is currently working at 80% of capacity. The current market price of the airbags is $125 per unit. Q. Suppose that Quest Motors requires that whenever divisions with unused capacity sell products internally, they must do so at the incremental cost. Evaluate this transfer-pricing policy using the criteria of goal congruence, evaluating division performance, motivating management effort, and preserving division autonomyarrow_forwardGreen Manufacturing is a traditional manufacturing company located in the midwestern United States. The company's operations manager is developing a strategy to become more CSR-oriented. In an effort to evaluate possible areas where CSR initiatives can be implemented, the manager has gathered the following data regarding three potential CSR activities: Initial Added Cost Variable Cost Variable Savings Recycle and reuse production materials $ 5,000 $0.10 per lb. of recycled material $0.15 per lb. of recycled material Add solar panels as a source of power 700,000 $ 1,000 per year $ 33,000 per year Replace assembly room light fixtures with natural light 120,000 $ 180 per month $ 220 per month The recycling activity would carry on indefinitely. The solar panels would have a useful life of 30 years. The replacement of assembly room light fixtures with natural light is assumed to have an 80-year effect. a. Identify which CSR activities Green Manufacturing should…arrow_forward
- As the newly appointed Controller of Lynbrook, Inc. you have been asked to evaluate several scenarios that management is considering to improve the overall profitability of the company. Lynbrook manufactures and sells a product called a Wren, its only product. The company normally produces and sells 60,000 Wrens each year at a selling price of $32 per unit. The company's unit costs at this level of activity are included below: Direct materials $10.00 Direct labor 4.50 Variable manufacturing 2.30 overhead Fixed manufacturing overhead 5.00 ($300,000 total) Variable selling expenses 1.20 Fixed selling expenses 3.50 ($210,000 total) Total cost per unit $26.50 The CFO of Lynbrook would like your response to the following three (3) independent situations to present to the management team early next week. Situation #1 Assume that Lynbrook has sufficient capacity to produce 90,000 Wrens each year without any increase in fixed manufacturing overhead costs. The company could increase its unit…arrow_forwardSuppose Gaurab Chakrabarti and Sean Hunt’s company, Solugen, makes peroxide-based cleaners in different strengths. The founders must decide on the best sales mix. Assume the company has a capacity of 400 hours of processing time available each month and it makes two types of cleaners,Deluxe and Premium. Information on these products follows.arrow_forwardGreen Manufacturing is a traditional manufacturing company located in the midwestern United States. The company’s operations manager is developing a strategy to become more CSR-oriented. In an effort to evaluate possible areas where CSR initiatives can be implemented, the manager has gathered the following data regarding three potential CSR activities: Initialadded cost Variable cost Variable savings Recycle and reuse production material $5,000 $0.10 per lb. of recycled material $0.15 per lb. of recycled material Add solar panels as a source of power 700,000 $1,000 per year $33,000 per year Replace assembly room light fixtures with natural light 120,000 $180 per month $220 per month The recycling activity would carry on indefinitely. The solar panels would have a useful life of 30 years. The replacement of assembly room light fixtures with natural light is assumed to have an 80-year effect. a. Determine if it is viable to recycle and use…arrow_forward
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubCornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningEssentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning
- Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax CollegeFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning