Tijuana Bronze

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Valves Pumps Flow Controllers

Receiving 600 3,800 15,600

Handling 6,000 38,000 156,000

Packing 2,400 13,800 43,800

Engineering 20,000 30,000 50,000

Maintenance 10,500 17,400 2,100

Depreciation 93,750 156,250 20,000

Set-up 128 640 1,920

Material 120,000 250,000 88,000

DL 30,000 100,000 25,600

Total Costs $283,378 $609,890 $403,020

Units in production 7,500 12,500 4,000

Cost per unit $37.78 $48.79 $100.76

*all values are calculated by the given percentage of transactions in Exhibit 3 as previously explained at the beginning of the problem (not including set up, material costs, and DL which costs are given previously)

**these values are based on the total production for each product line. Meaning 7,500 units of valves, 12,500 units of pumps, and 4,000 units of flow controllers.

5)

It should not matter which method of allocating costs is used when determining the net income because the total amount of costs is still the same across both methods and therefore with the same amount of units sold, net income will not be any different.

6)

As we are given the gross margins for the standard costs of the previous month those percentages will help decipher which system should be favored, or in other words which will give us the highest margins when comparing it to the selling price. All costs for other systems are drawn from previous problems stated above.

Valves Pumps Flow Controllers

Actual Selling P 57.78 81.26 97.07

Standard Cost 37.56 63.12 56.50

$ Margin 20.22 18.14 40.57

% Margin 35% 22% 42%

Revised Cost 49.00 58.95 47.96

$ Margin 8.78 22.31 49.11

% Margin 15% 27% 51%

ABC Cost 37.78 48.79 100.76

$ Margin 20.00 32.47 (3.69)

% Margin 35% 40% (4%)

*highlighted % margins mean that they are the highest for that product line

These results make it hard to choose which system is the best. For Valves both Standard cost and ABC cost create a 35% margin which gives ABC the upper hand slightly as they are highest for Pumps as well and the other systems are only highest on one product line. If I had to choose I would choose ABC cost because of that but it looks like whichever system were to be chosen, they would be highest in one category and not in the next so they would not go wrong choosing any of the systems in my opinion.

7)

It looks like the flow controllers have a very low material cost and require less labor as stated in the case, but have a very high expense of handling which adds to their high cost per unit. Also the packing and shipping costs are way higher for flow controllers than they are for pumps and valves since they are packed/shipped once ready and not done on a completely standardized or consistent pace.

8)

A recommendation that I would have for Tijuana Bronze is to look into dropping Flow Controllers as a product line because under the ABC cost system they have a negative gross margin as well as require a large amount of manufacturing overhead to sustain them. Granted they have this line to utilize their machine time but when creating a product that has a negative gross margin maybe there is another piece that could be created that would create better returns for their company. Another recommendation that I have would be to increase the price of pumps since the actual selling price is so much lower than the targeted selling price and they still have pretty good margins under all three systems, if they were able to increase the selling price and therefore increase margins for pumps they should be able to see more revenue as a company.