Classroom Exercises – Strategic-Based Responsibility Accounting

Waiting Time
Little Dog Unlimited makes small motorcycles. The monthly demand ranges from 80 to 100
motorcycles. The average demand is 92 motorcycles. The plant operates 300 hours a month. Each cycle
takes approximately 1.5 hours.
If the company adds a new line of scooters, initial demand will be 20 per month. Each scooter
will take 1 hour to make. To offset approaching production capacity, expanding the assembly line is
possible. This will decrease manufacturing time for all products by 20%. However, this will increase the
costs of cycles from $400 to $500 and scooters from $200 to $240. The change will also cause increases
in prices from $700 to $750 for cycles and from $450 to $500 for scooters.

Required:
a. What is the average waiting time for cycles if they are the only item manufactured?
b. What are the average waiting times if both cycles and scooters are produced and the assembly
line is not enlarged?
c. What are the average waiting times if both cycles and scooters are produced and the assembly
line is enlarged?
d. What is the expected monthly margin without scooters if the company sells all 92 cycles it
manufactures?
e. What are the expected monthly contribution margins if scooters are made with the current
assembly line and with the new assembly line? Assume average sales and that sales equal
production.
f. What action do you recommend?

Balanced Scorecard Causal Model

Advanced Company estimates that spending $29,500 in employee training will result in decrease
in reworks, thereby reducing variable production costs by 6%. Likewise, reduced defective units will
increase customer satisfaction, thereby improving market share to 22.5%. Current production and sales
amount to 4,400 units; selling price is $200 per unit; and total product cost is $150 (60% of which is
variable cost). Total market is at 22,000 units.

Required:
a. Draw a strategy map illustrating causal paths of the strategy implemented by Advanced
Company.
b. What is the net advantage (disadvantage) of this endeavor?

Throughput Analysis
The Cuddly Creations Company produces small plastic dolls in its Georgia manufacturing plant.
The company is currently evaluating ways to improve productivity. The accountant of the firm's parent
organization suggested that management implement a new compensation plan based on throughput
performance measure as an incentive to increase productivity. To demonstrate how such a measure
might work, the accountant gathered the following production data for a recent month

Total units attempted 6,000,000

Good units manufactured 4,800,000
Processing time (total hours) 800
Value-added processing time 600

Required:
a. How many defective units were produced?
b. Compute manufacturing cycle efficiency.
c. Compute process productivity.
d. Compute process quality yield.
e. Compute hourly throughput.
Learning Curve
The Nautilus Company, which is under contract to the U.S. Navy, assembles troop deployment
boats. As part of its research program, it completes the assembly of the first of a new model (PT109) of
deployment boats. The Navy is impressed with the PT109. It requests that Nautilus submit a proposal on
the cost of producing another six PT109s. Nautilus reports the following cost information for the first
PT109 assembled and uses a 90% cumulative average-time learning model as a basis for forecasting
direct manufacturing labor-hours for the next six PT109s. (A 90% learning curve means b = –0.152004.)

Required:
a. Calculate predicted total costs of producing the six PT109s for the Navy. (Nautilus will keep the
first deployment boat assembled, costed at $1,575,000, as a demonstration model for potential
customers.)
b. What is the dollar amount of the difference between (a) the predicted total costs for producing
the six PT109s in requirement 1, and (b) the predicted total costs for producing the six PT109s,
assuming that there is no learning curve for direct manufacturing labor? That is, for (b) assume a
linear function for units produced and direct manufacturing labor-hours.
c. Assume that Nautilus uses a 90% incremental unit-time learning model as a basis for predicting
direct manufacturing labor-hours in its assembling operations. (A 90% learning curve means b =
–0.152004.) Prepare a prediction of the total costs for producing the six PT109s for the Navy.

Strategic Profitability Analysis

Westwood Corporation makes a high-end kitchen range hood, KE8. Westwood Corporation
presents the following data for the years 2016 and 2017:

2016 2017
Units of KE8 produced and sold 40,000 42,000
Selling price $100 $110
Direct materials (square feet) 120,000 123,000
Direct materials costs per square foot $10 $11
Manufacturing capacity for KE8 50,000 units 50,000 units
Total conversion costs $1,000,000 $1,100,000
Selling and customer-service capacity 30 customers 29 customers
Total selling and customer-service costs $720,000 $725,000

In 2013, Westwood Corporation produced no defective units and reduced direct materials usage
per unit of KE8 in 2013. Conversion costs in each year are tied to manufacturing capacity. Selling and
customer-service costs are related to the number of customers that the selling and service functions are
designed to support. Westwood Corporation has 23 customers (wholesalers) in 2012 and 25 customers
in 2013.

Required:
a. Prepare partial productivity profiles for 2016 and 2017.
b. What is the total factor productivity (TFP) for 2016 and 2017?
c. Calculate the growth, price-recovery, and productivity components that explain the change in
operating income from 2016 to 2017. Determine the revenue and cost effect of each
component.
d. Suppose during 2017, the market size for high-end kitchen range hoods grew by 3% in terms of
number of units and all increases in market share are the result of Westwood’s strategic actions.
Calculate how much of the change in operating income from 2016 to 2017 is due to the
industry-market-size factor, product differentiation, and cost leadership.
e. How successful has Westwood been in implementing its strategy? Explain.
f. Suppose Westwood can add or reduce its selling and customer-service capacity in increments of
three customers. What is the maximum amount of costs that Westwood could save in 2017 by
downsizing selling and customer-service capacity?

Answer:
a. ($400 x 5,000) – [($40 x 15,000) + ($100 x 10,000) + ($6,000 x 60)] = $40,000

b. ($440 x 5,500) – [($44 x 15,375) + ($110 x 10,000) + ($6,250 x 58)] = $281,000

c. $40,000 – $281,000= $241,000 F

a. (5,500 – 5,000) x $400 = $200,000 F

b. 15,000 x 5,500 / 5,000 = 16,500; [(16,500 – 15,000) x $40]

+ [(10,000 – 10,000) x $100] + [(60 – 60) x $6,000] = $60,000 U

c. $200,000 F + $60,000 U = $140,000 F

a. ($440 – $400) x 5,500 = $220,000 F

b. 15,000 x 5,500 / 5,000 = 16,500; [($44 – $40) x 16,500] + [($110 – $100) x 10,000] + [($6,250
– $6,000) x 60] = $181,000 U

c. $220,000 F + $181,000 U = $39,000 F

d. 15,000 x 5,500 / 5,000 = 16,500; [(15,375 – 16,500) x $44]

+ [(10,000 – 10,000) x $110] + [(58 – 60) x 6,250] = $62,000 F
 Answer:

a. Waiting time = [92 x (1.5)2] / {[2 x [300 hr. a month – (92 x 1.5)]}
= 0.639 hours

b. WT = (92 x (1.5)2) + (20 x 1) / {2 x [300 – (92 x 1.5) – (20 x 1)]}

= 227/284 = 0.799 hours

c. WT = (92 x (1.2)2)+ (20 x (0.8)2) / {2 x [300 – (92 x 1.2) – (20 x 0.8)]}

= 145.28/347.2 = 0.418 hours

d. Expected monthly margin without scooters:

Motorcycle sales (92 x $700) $64,400
Manufacturing costs (92 x $400) 36,800
Expected margin $27,600

e. Without changing assembly line:

Motorcycle sales (92 x $700) $64,400
Scooter sales (20 x $450) 9,000
Total expected sales 73,400

Manufacturing costs:
Motorcycles (92 x $400) $36,800
Scooters (20 x $200) 4,000 40,800
Expected margin $32,600

With new assembly line:

Motorcycle sales (92 x $750) $69,000
Scooter sales (20 x $500) 10,000
Total expected sales 79,000

Manufacturing costs:
Motorcycles (92 x $500) $46,000
Scooters (20 x $240) 4,800 50,800
Expected margin $28,200

f. Unless there are critical customer relation problems with a slower response time, the
scooters should be added without changing the assembly line. The expected margin is
$4,400 higher without the new assembly line ($32,600 – $28,200).

Difficulty: 3 Objective: 6
Terms to Learn: average waiting time

ANS:

a. Defective units = 6,000,000 - 4,800,000 = 1,200,000

b. MCE = 600 ( 800 = 75%
c. Process productivity = 6,000,000 ( 600 = 10,000 units per hour
d. Process quality yield = 4,800,000 ( 6,000,000 = 80%
e. Throughput = 10,000 x .75 x .8 = 6,000 dolls per hour