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Question 2: Managing costs: value engineering, target pricing and ABM [22 marks]

Mext is a company that design, manufactures and sells luxury furniture with a twist. One year ago, the company launched a set of barstools that retails for $200 each. In the past year, Mext has generated a profit margin of 30% of the retail price. However, a competitor recently released a  similar product for 20% cheaper.

Based on a closer inspection of the costs associated with the barstools, the management accountant of Mext produced the following costs over the 4 year life cycle of the barstool

Research and Development Costs	Year 0:                     $300,000
Design Cost	Year 0:                     $300,000 Year 1:                     $200,000
Direct Materials	$75 per unit
Direct Manufacturing Labour	$30 per unit
Manufacturing Overhead	$30 per unit
Marketing	Year 0:                    $150,000 Year 1:                    $  80,000 Year 2:                    $  30,000
Customer Support	Year 1:                    $  60,000 Year 2:                    $100,000 Year 3:                    $  40,000

The forecasted sales over the four years are as follows.

Year 1	5000
Year 2	10000
Year 3	3000

Required:

1. Calculate the target cost for the barstools that will meet the target selling price? (2 marks)

2. Prepare a life cycle budget for Mext barstools over the four years? (8 marks)

3. Calculate the unit cost of producing the barstool over the life cycle of the product? Why is the calculation of the unit cost based on the above manufacturing overhead inaccurate? (4 marks)

4. Identify and explain two alternative ways that Mext can reduce the unit cost of barstools? (4 marks)

5. The manager of Mext suggests that they could reduce the overall cost of the barstool through reducing the costs of quality. Explain how this can be done? In your answer refer to customer support activities (4 marks)

[Suggested Word limit: 750 words. Note the word count at the end of your answer]

Your Answer (Insert rows/columns and expand the space as required): Word count =

(Question 3 is on the Next Page)

Question 3: Supplier Costing, Cost, and Inventory Management (38 marks)

Question 3.1 (18 marks)

You are the management accountant of a manufacturing company, ABC Industries, that heavily relies on suppliers for raw materials. Effective management of supplier costs, overall costs, and inventory is crucial for maintaining profitability and operational efficiency.

Required:

1. Explain how close relationships with suppliers can help manage supplier costs? In your answer, you should refer to unit-level, order-level and supplier-level costs. (6 marks)

2. Your boss is interested in implementing a Just-In-Time (JIT) inventory system. He has asked you for advice. Discuss the advantage and disadvantages of implementing such a system? Illustrate your answer using events in recent years.  (10 marks)

Question 3.2 (22 marks)

Tryson Industries is undertaking an analysis of supplier costs to evaluate the relative costs and performance of each supplier. Currently, they are focusing attention on the two suppliers of door handles. The suppliers are Restex Ltd and Steel Ltd. Tryson has been dealing with these suppliers for several years. Most orders are placed with Restex Ltd since it charges only $3.50 per handle, whereas Steel Ltd charges $4.00 per handle. In the past year, ABC industries has purchased 30,000 handles from Restex Ltd and 15,000 handles from Steel Ltd. For the most recent year, the following supplier-related activities and costs were identified:

Activity	Total cost	Number of activities
Place purchase order	$40,000	160 orders
Receive and inspect deliveries	$125,000	625 deliveries
Store inventory	$12,000	400 units stored per year
Rework product due to poor quality material	$36,000	600 units reworked
Production downtime due to poor quality material	$7,000	100 hours downtime
Receive and inspect late deliveries	$32,000	80 late deliveries

An analysis revealed that last year the following activities related to the two suppliers:

Activity	Restex Ltd	Steel Ltd
Place purchase order	30 orders	20 orders
Receive and inspect deliveries	350 deliveries	150 deliveries
Store inventory	80 units per year	20 units per year
Rework product due to poor quality material	300 units	20 units
Production downtime due to poor quality material	36 hours	6 hours
Receive and inspect late deliveries	60 late deliveries	5 late deliveries

Required:

Calculate the following:

Unit and total supplier related activity costs for each supplier                                    (8 marks)

Unit and total cost of ownership for each supplier                                                       (2 marks)

The supplier performance index for each supplier.                                                        (2 marks)

Based on your calculations, discuss the relative performance of each supplier. (5 marks)

What changes would you recommend to minimise supplier-related costs. (5 marks)

[Suggested Word limit: 750 words. Note the word count at the end of your answer]

Your Answer (Insert rows/columns and expand the space as required): Word count: