Question

Question 3 (10 Marks) Glass Creations designs, manufactures, and sells modern glass sculptures. Sabrina Jenkinson is an artist for the company. Jenkinson has spent much of the past month working on the design of an intricate abstract piece. Jimmy Smith, product development manager, likes the design. However, he wants to make sure that the sculpture can be priced competitively. Alex Nebraska, Glass's cost accountant, presents Smith with the following cost data for the expected production of 100 sculptures: $15,000 Design cost $54,000 Direct materials $ 33,000 Direct manufacturing labour $ 40,000 Variable manufacturing overhead $38,000 Fixed manufacturing overhead Marketing $ 26,000 Consider each of the following four situations independently Required: a. Smith thinks that Glass Creations can successfully market each piece for $2,550. The company's target operating income is 20% of revenue. Calculate the target full cost of producing the 100 sculptures. Does the cost estimate Nebraska developed meet Glass's requirements? Show all relevant calculations. (3 marks) b. Smith discovers that Jenkinson has designed the sculpture using the highest grade glass available, rather than the standard grade of glass that Glass Creations normally uses. Replacing the grade of glass will lower the cost of direct materials by 45%. However, the redesign will require an additional $2,700 of design cost, and the sculptures will be sold for $2,300 each. The company's target operating income is 20% of revenue. Willl this design change allow the sculpture to meet its target cost? Show all relevant calculations. (3 marks) c. Jenkinson insists that the higher grade glass is a necessity in terms of the sculpture's design. She believes that spending an additional $27,000 on better marketing will allow Glass Creations to sell each sculpture for $3,000. The company's target operating income is 20% of revenue. If this is the case, will the sculptures' target cost be achieved without any value engineering? Show all relevant calculations. (3 marks) d. Compare the total operating income on the 100 sculptures for requirements b. and c. What do you recommend Glass Creations do, based solely on your calculations? Explain briefly (1 mark)

Answer 1

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Part a
Design cost	$                  15,000
Direct materials	$                  54,000
Direct manufacturing labor	$                  33,000
Variable manufacturing overhead	$                  40,000
Fixed manufacturing overhead	$                  38,000
Marketing	$                  26,000
Total cost	$               206,000
Cost per unit ($206,000 ÷ 100)	$                    2,060
Target cost per unit ($2,550 × 0.80)	$                    2,040
Profit per unit ($2,550 – $2,060)	$                        490
The cost estimate developed by Nampa does not meet Wood Creations’ requirements. Value engineering will be needed to reduce the cost per unit to the target cost.
Part b
Total costs (requirement 1)	$               206,000
Less: Reduction in material costs ($54,000 × 45%)	$               (24,300)
Add: Increase in design costs	$                    2,700
Total costs of redesigned table	$               184,400
Revised cost per unit ($184,400 ÷ 100)	$                    1,844
Revised target cost per unit ($2,300 × 0.80)	$                    1,840
Profit per unit ($2,300 – $1,844)	$                        456
The design change allows the sculpture to meet Wood Creations’ requirements for target costing. The cost of materials is a locked-in cost once the design is finalized.
Part c
Revised total cost ($206,000 + $27,000)	$               233,000
Revised cost per unit ($209,000 ÷ 100)	$                    2,330
Revised target cost per unit ($3,000 × 0.80)	$                    2,400
Profit per unit ($3,000 – $2,330)	$                        670
No, this proposal does not allow the sculpture to meet Wood Creations’ requirements for target costing. Value engineering will be needed to reduce the cost per unit to the target cost.
Part d
	Requirement 2	Requirement 3
Revenue ($2,300 × 100; $3,000 × 100)	$               230,000	$               300,000
Total costs	$             (184,400)	$             (233,000)
Operating income	$                  45,600	$                  67,000
Even without value engineering, Wood Creations should implement the actions in requirement 3
Even though it does not achieve the target cost because it earns a higher overall operating income. Doing value engineering will help it increase operating income even more relative to requirement 2