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Newcastle Division Problems




Question;A meeting of senior managers at the Newcastle;Division has been called to discuss the pricing strategy for a new product.. In;the last year a significant number of new products have failed to achieve their;forecast sales volumes. The accountant has already stated that the profit for;the year-end will be lower than budget and the main reason for this is the;disappointing sales of new products. As a result, two different strategies are;proposed.;Details of;pricing strategies;The first strategy is to set a selling price of $170;with annual fixed costs at $22,000,000.;A number of managers are in favor of this strategy;as they believe it is important to;reduce costs.;The second strategy is to have a much higher;expenditure on advertising and promotions;and set a selling price of $190. With the higher;selling price the annual fixed costs would;increase to $27,000,000. The marketing department is;very clear that greater expenditure;on advertising and promotions is essential for this;product.;The problem has been estimating demand, particularly;elasticity of demand.;Managers are uncertain if demand is elastic (i.e.;goes UP with a price decrease and DOWN with a price increase) or inelastic;(demand is relatively stable whether prices go up or down).;Estimated demand (units);150,000;160,000;180,000;200,000;210,000;Variable costs;per unit;The managers estimate that the variable cost per;unit is $35.;Overhead;Overhead is applied based on ABC. There are four;activity pools;Activity Estimated Costs Estimated Activity Level;Set-ups $500,000100,000;Finishing $600,000 50,000;Product changes $100,000 25,000;Assembly $300,000 60,000;Actual activity;was as follows;Set-ups 10;Finishing 5;Product changes 10;Assembly 5;Service Costs;There are two production departments: Assembly and Finishing. Each of;these two departments uses the services provided by the IT and Maintenance;Departments, which both support the production functions and each others?;functions as well. Newcastle uses the;step method of allocating these service department costs to the production;departments. IT is allocated on the;basis of hours of department operations and Maintenance is allocated on the;basis of departmental Direct Labor hours.;Maintenance is allocated first.;The following costs;pertain to the IT and Maintenance Departments? total costs;IT: $400,000;Maintenance: $200,000;Use the calculated OH;costs calculated above in answering #C below.;Production Department data;Assembly;Finishing;IT;Maintenance;Hours;of operation;10,000;15,000;30,000;5,000;Direct;labor hours recorded;8,000;16,000;8,000;16,000;Required;a. Determine the amount of Maintenance costs allocated to the Assembly;and Finishing Departments using the step method of allocating service;department costs.;b. Determine the amount of IT costs allocated to;the Assembly and Finishing Departments using the step method of allocating;service department costs.;c. Determine the total overhead costs of the Assembly;and Finishing Departments when this (step) method of allocating service;department costs is used.;Questions;Question 1;What is the break-even for each alternative? Show;calculations.;Question 2;What is the total product cost, excluding service;department allocations, for each alternative?;Question 3;What is the;total cost that should be attributed to each alternative, including allocated;service costs?;Question 4;Explain how your answer would change if demand;elasticity was;a) elastic b);inelastic


Paper#43107 | Written in 18-Jul-2015

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