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You have been studying fixed costs. You learned that a number of fixed costs are actually mixed costs (variable and fixed). Write a 2 paragraph memo to your manager to explain various cost estimation techniques that can help determine the fixed and variable portion of each mixed cost (such as utility costs, maintenance costs) and why it is relevant to more accurately understand the types of costs.

Explain how to arrive at the appropriate derivation of a cost.
Use effective communication techniques

The make or buy decision. Cardinal Company uses a certain part in its manufacturing process that it buys from an outside supplier for $36 per part plus another $5 for shipping and other purchasing related costs. The company will need 18,000 of these parts in the next year and is considering making that part internally. After performing a capacity analysis, Cardinal determined that it has sufficient unused capacity to manufacture the 18,000 parts but would need to hire a manager at an annual salary of $54,000 to oversee this production activity. Estimated production costs are determined to be:

Direct material $23.00
Direct Labor $10.00
Variable overhead $5.00
Fixed overhead (including manager at $3 per unit) $8.00
Total unit cost $46.00

Required:

a) Identify the relevant costs to make this part internally.

b) Should Cardinal produce the part or continue to buy it from the outside supplier?

c) What other factors are important to this decision?

Target costing. Rainbow Cruises operates a week long cruise tour through the Hawaiian Islands. Passengers currently pay $1,500 for a two person cabin, which is an all inclusive price that includes food, beverages, and entertainment. The current cost to Rainbow per two person cabin is $1,200 for the week long cruise, and at this cost, Rainbow is able to earn the minimum profit margin needed to operate the business. Rainbow competes with two other cruise lines and ,to date, $1,500 has been the prevailing market price for the week long cruises. Each cruise line provides exactly the same services to their passengers, but recently, one of Rainbow s competitors has found a way to permanently lower its price to $1,250 per two person cabin.

Required:

a) At a new market price of $1,250 per two person cabin, calculate the target cost that will allow Rainbow to earn the same profit margin percentage it currently earns.

b) Calculate the target cost reduction that Rainbow must achieve if it expects to remain competitive.

c) Describe several cost reduction initiatives that Rainbow might explore to achieve its target cost reduction requirements.

Accept special sales order? Surelock Manufacturing Co. makes and sells several models of locks. The cost records for the C2900 lock shows that manufacturing costs total$23.25 per lock. An analysis of this amount indicates that $13.40 of the total cost has a variable cost behavior pattern, and the remainder is an allocation of fixed manufacturing overhead. The normal selling price of this model is $31 per lock. A chain store has offered to buy 12,000 C2900 locks from Surelock at a price of $16.25 each to sell in a market that would not compete with Surelock s regular business. Surelock has manufacturing capacity available and could make these locks without incurring additional fixed manufacturing overhead.

Required:

a) Calculate the effect on Surelock s operating income of accepting the order from the chain store.

b) If Surelock s costs had not been classified by cost behavior pattern, is it likely that a correct special order analysis would have been made? Explain your answer.

c) Identify the key qualitative factors that Surelock managers should consider with respect to this special order decision.

On January 1, Puckett Company paid $1.6 million for 50,000 shares of Harrison s voting common stock, which represents a 40 percent investment. No allocation to goodwill or other specific account was made. Significant influence over Harrison is achieved by this acquisition. Harrison distributed a dividend of $2 per share during the year and reported net income of $560,000. What is the balance in the Investment in Harrison account found in the financial records of Puckett as of December 31?

You have been assigned the task of examining the pertinent information and proposing two recommendations for the Vice President.

The Vice President of Operations would like to increase profitability, improve customer service, and expand the business. Even though the external accounting department spends 5 days preparing each quarter s financial statements and disclosures, she does not examine those financial statements issued to the company shareholders.

You are to attend an afternoon meeting to discuss why this is the case. You have been assigned the task of examining the pertinent information and proposing two recommendations for the Vice President. These recommendations are to take effect at the end of the quarter.