B18 MAKING THE CONNECTION INTEGRATIVE EXERCISES Part 3 Chapters 11-15. Zando Pharmaceuticals is an aifilate of the German-based Heisenberg Corporation, which emptoys 40,000 waridwide. Zando’s St, Louis facility houses the U.S, corporate headeasar Development {R&D}, It produces employees on aitibuted Incroscad campsttion, customer dissatisfaction, end regulatory pressures, Luis Avered, presier Zand, called a macting to consider ways 10 in ability, He label planning session and invited the following oicers: Kathy Shorts, ervonmental manager; Troy Lewis, head of 88D: Johany Mirukave, vice president of procluction and quality: Larry Sewer, view prose of finance; and Doraan Savars, marketing veo prosicont te In cocent ye quarterly fnancial repors for the last ta years, The trends are nego: market share, prcfits are decreasing, and aur costs saam to be increasing to do search srengths, it seas lo me that our best bet is 1a grow revenues by introduicng new rath proprietary rights. As far as costs are concemed, we eed ta imprave cur perlarmance on tha mension 2s well. Lawer per-uni nd exsting ereducts ara needed, Any suggestions?” Luis: “You all have received tive. Ne are losing ‘and reduce cos ko actions to neraoes ond 5 quickly as possible. Gis Troy: “For our products, our ability to contiol casts resides in development—my ares—rether thar manufacturing, We probably neesl to pay move attention to raduct and ammcoss dle fonsure 3 reasonably level por-unit cost. Revenuos are alzo sffactad m th stage. O drug, the clock begins to tick, and we need to recluce tme to market. Significantly, reducing market wil allove us to te revenues for a longer period of Une than we are curently experics ould also De helpful F we could reduce the cycle tme for product development. Bath actions cull increase ravenaes. Finally, wa can increate revenues by imereasing the volume of nes Johnny: "Thare iss lot of mart so the observation tha product developereat, On st racluction opportunities re drug is spproved, ts approval includes the manufacturing recess. Any changes in the manuiacturing process require approval from the U.S. Feed and Drug Administ Tio, Because of this, we have boon reluctant, historcaly, to engeae in pracess improvement or reer gineering, However. | wonder fuse shouldn't reconsicer this longstanding policy Same o! the quality 2 mostly probleme wo have could thee corrocted by changing some of our existing pracesses, from seeking FDA approval. | think our quality co rtunity for marovament, ay eesily exceed any cost incurn psig are at leas 15 percent of sales. that's 2 lot of 0 @ and the manufacturing rt lopment st ss some vary gored 0} tec ‘strategic theme. The environmer nt pcllution prevention act passed by she legislature requires that we calcula vs This loping en environmental cost management sysiem. The results so far indicate that enwianmertal are much more than we realized. They are estimated 29 be in the range af 20 to 30 operating costs. Environmental costs can oe reduced by such things as computerzing chemica ventory, eliminating the use of chlorinated solvents and other hazardous matarials, reducing our ese of virgin fo: and redesigning processes and otaducts so that we can ‘educe tone vesicle wlease. We cer really have a positive environmental impact while simultaneously reducing costs 1 ‘nore altention is paid to environmental issues Gurng product development.”Doreen: “| ke what | am hearing because | think that t also affects our abilty to inevease market share and revenues. For example, environmental impact is one of 01 pharmacy chains pay 1o green preducts, and “ight nas ved. |am convinced that doing 20 w allow us to increase market share. Quality is another important matter, We have had to recall batches of products during the past wo years due to poor quality, end this has hum cur image more than the environmental issue. Imoraving the processes 20 avaid shese kinds of problems will save us a de t2 bo ime: (Qur environments! mage is negativ (ot of grsh Product imago are ropuitstian ars estential ta ineraasing custamer satisfaction and market Luis: “We ctartad with the need te improve financial peromnsnce lop hereacing ravanues and codu 5, we have some very good suggestions to help achieve these two objectives, but | have: seme concerns, Fist, do wwe have the talent and capabilities co improve quality andi e» formance? Tray, do your professionals really understand what they need to do to improve provess design 12e the desired quality and environmental improvements? Aso. he jie for products and the time te morkel once patented” Troy: "Lot mo answar thove questions in order. Fret, we f Ig design issues. We will neac ta de some training to help our research stientiate end cho engmeers understand the consequences. We may need to hire 2 couple of professionals who have experience in dealing with ond, we may need to make cycle time and lime to market Significant performance measures ane reward our people for actions that luce those me emelayoes need to align their itorecte w oly are lacking the undere those of the company. we can achiova the, see more revenue oroduced oer employee.” Luis: “Good, Now, Johnny, tell us ebout production and quality. Oo our manufacturing enginaers ard production workers need envirormentl and quality issues? Johnny: “Without question, training will be needed. Moreover, | realy need te hir couple of quality Kathy: */ also think thacwe need an envi aeturh Luis: “Good. YWe cenanly shouldn't ignore the necessary Infrastructure to bring about the needed hanges. Lany, you have been relatively quiet, what do you think sbout all this? Do you have any suggestions? Larry: “Infrastructure is important. If this is all going ta work, timely prentded! Iris hare! sitkind of © 12 of revamping the cost managorient infor rraton sysem so that Iris activity based ard so thal we can provide quality and envrcnmental cost inlormation. After listening to the comments made here, | might also suggest that we need a stiatecic risasurement system that cen be used to align the interests af our employees with our improvement sratagy. People brow what s mpertant, thet tha important 4 accurate information will be iets and procasses with cost being a signiicant sue without pr gh a the proc ors are being maasured, ancl tbat they are gaing te be evaluated ond rewarded bated on these factors. Finally, would encourage che use of target costing to help mana during product development. To help you all under- Stand the importance of good infermation, | have assembied some activity data relating to two new rroduers curently under development, These two products will se the same process, using different st olzact modules with an accompanying Is. of activity divers to feclitate the use of an ABC software package secenty sequired by Zarco. Resource Module (Projected General Ledger Costs of Manufacturing Process Assodated with the Twe Products) Matenals $2,000.08 Salaries and weges 1,000,000, Ene: 500,000, License fee (environmental 200000 Enyanmental nes cation, pollution contral equipmentResource Driver (Parcontage Usage) Materials Labor Energy Fees Fines Supervising process om 10% 0% om oe Setting up 3 1 0 a alonding chemicals 80 ° 9 Producing waste 10 8 0 0 Disposing of hazardous vaste 6 . 40 70 Inspecting proccss 0 4 c 0 Relmasing air contaminants 0 o 60 20 Operating pllution centro! equines 3 5 0 0 1 9 pray as Cost Object Modula (Products and Projected Activity Usage) Cost Objects ‘AntibioticXK1 Antibiotic XKS pected Gutput (pounds) 50,000 Setup hours 7.960 Direct labor hours (bloncing) 24,000 16.000 Pounds of waste 8,000 2,000 Pounds of haraidous waste 5,000 ‘00 Hous of inspaciien 3,000 500 Tons of air contaminants 45 05 Macnine hours (pollution contr) 2,000 900 List of Activity Drivers ‘Aativity Drivers Activity Capacity Souphous 20,000 Divecc labor hours (blending) 40,000" Pouncs of wast 10.000" Pounds of 3.000 Hou'sof spe 4,000 Machine hours (pallusin control) 3.000 agate foul ae Soo viol ae Required 1. Use the comments ftom she executive meeting to identity seategic objectives and posible per lesspectives: financial, customer, enviconmental, proces srmend the Balanced Scorecard for Zando? why? formance measures for each of fve learning and grawts, Woule you Suppose thet Doreen suggested gainsraring in response to Tro 19 to reward deveoprrent employees for improving cycle time and tme to market, What is gainsharng? Hom coule it be used in tha praduct development setting?Deterine the cost of all acivities for the proposed new process. Now, assign the cast of the sec: ondary activity to the pamary activities. Classify the oumary actiitios inte three categores: env tal, quality, and other uelity nor environmental) Did some activities endl up in more than che category? Expl Calculate the cost per calculate the enviror About the veatve desirability of the two 1 for each of the proposed products using primary activiy rates. Now, nal cost per unit and the quality cost per uit What does this tall you reducers? Following Lany’s suagestion, Luis decided ta use ta Ing ta halp impmve new prec profitability, Bosed on analyso: ky Luis and Dercen, the target pricae fer KKT and XKS are $5 P lyoos by f pound and $35 per pound, respectively. Luis has indicated thet any new product should earn a {gross proft equal to 20 percent of sales, Based on this inform: ion, answer the following: 8. What is the target cost for each product? Given this information, what should be cone? 1 Suppose Ooxeen inci 1 can be increased by 50 percent if the seling price is owered by he same Luis wants the original profit por pound maintained), caleulate the new target costs. If all nan-valuc-addec Cons were elininated, could the wrget be mer? (Calalate the Tevl Now, calculate the eect an otal poits under a scaraio where nen-alue-addled cots Zenot eliminated versus a scenana where all nonvelua-actled costs are chminated (hclade anal cost at the $0,00C-unit sala ineresea in in ie analysie ary p10. Maing the Connsston ‘Assume that the slanderd hours allowee for the actual totel output of the fabric plant are 115,000. Caleulate the following vanances: 2, Ficod overhead eponding varance b. Fixed overhead volume varian c. Variable overhead spending variance d. Variable overhead efficiency variance Suppose that the faoce plans has S00 bolts of F870 in beginning finished! goods inventory. The lan is to have 1,000 bolts of F870 in finished goods inventory at the end of the year, This “abrie hae an extoral merkat prica of $400 por bol. the fabric plant is sal profit center, it could sell 3,000 bolts per year to oulside customers and supgly 2,000, year internally to Beauville's luriture plant I the fabric olant were designated as a protit the plant would wansier all goods internally at market oc want data, prepare the following for current-yoar sheet tas needed any other Sales budget bb. Production budget ©. Direct labor budget d. Cost of goad: cold bua Calculate the he fur rate and (2) des ning service costs to producing departments lowing overhead rates mente! rates. Use the di cure plant: (1) plan method for For aach of the ovarhaad rata: computed in Reciromont 9, calculate unit bid pricas For Jobs {A300 and B75, Assume that the company's eggressive bidding policy © unie cost alus 80 porcont Did departmental overhesd rates have any effect on Beauuille’s winning or losing bids? What recommendation would you make? Explain. Now, adjust the costs and bids for departmental rate bids using the proposed stanclard costs for the Coloring and Boking Deparment, Did this meke ronea? What doos this tal you? hat the & Supoe sre plantis set up as a presit cantar. Bolts of Fabric FB7O sel fer $400 for ca bbe bought for The fabric plant end the fumisure plan: both nev. excess capacity. Assume that Job A500 Is @ special order. The fabric and furnitute lenis have ty 9 satisfy the demancés of Jeb ASDO, What is the minimurn HF the maximum transfer price is S4D0, by haw much do the fabric plant's orat ite increase ifthe twa protis cortere negotiate a transfer orice that spite the joint benetil? 00 from outside supplies suffcien: excess capa fora bok