Cost-plus and market-based pricing. (CMA, adapted) Precision Laboratories evaluates the reaction of materials to extreme increases in temperature. Much of the company's early growth was attributable to government contracts, but recent growth has come from expansion into commercial markets. Two types of testing at Precision are Heat Testing (HTT) and Arctic-Condition Testing (ACT). Currently, all of the budgeted operating costs are collected in a single overhead pool. All of the esti- mated testing-hours are also collected in a single pool. One rate per test-hour is used for both types of testing. This hourly rate is marked up by 40% to recover administrative costs and taxes and to earn a profit. Jeff Boone, Precision's controller, believes that there is enough variation in the test procedures and cost structure to establish separate costing rates and billing rates at a 40% markup. He also believes that the inflexible rate structure the company is currently using is inadequate in today's competitive environment. After analyzing the company data, he has divided operating costs into the following three cost pools: $ 500,000 300,000 360,000 $1,160,000 Labor and supervision Setup and facility costs Utilities Total budgeted costs for the period Jeff Boone budgets 100,000 total test-hours for the coming period. Test-hours is also the cost driver for labor and supervision. The budgeted quantity of cost driver for setup and facility costs is 600 setup hours. The budgeted quantity of cost driver for utilities is 9,000 machine-hours. Jeff has estimated that HTT uses 60% of the test-hours, 20% of the setup-hours, and half the machine- hours.
Cost-plus and market-based pricing. (CMA, adapted) Precision Laboratories evaluates the reaction of materials to extreme increases in temperature. Much of the company's early growth was attributable to government contracts, but recent growth has come from expansion into commercial markets. Two types of testing at Precision are Heat Testing (HTT) and Arctic-Condition Testing (ACT). Currently, all of the budgeted operating costs are collected in a single overhead pool. All of the esti- mated testing-hours are also collected in a single pool. One rate per test-hour is used for both types of testing. This hourly rate is marked up by 40% to recover administrative costs and taxes and to earn a profit. Jeff Boone, Precision's controller, believes that there is enough variation in the test procedures and cost structure to establish separate costing rates and billing rates at a 40% markup. He also believes that the inflexible rate structure the company is currently using is inadequate in today's competitive environment. After analyzing the company data, he has divided operating costs into the following three cost pools: $ 500,000 300,000 360,000 $1,160,000 Labor and supervision Setup and facility costs Utilities Total budgeted costs for the period Jeff Boone budgets 100,000 total test-hours for the coming period. Test-hours is also the cost driver for labor and supervision. The budgeted quantity of cost driver for setup and facility costs is 600 setup hours. The budgeted quantity of cost driver for utilities is 9,000 machine-hours. Jeff has estimated that HTT uses 60% of the test-hours, 20% of the setup-hours, and half the machine- hours.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
If Precision’s competition all charge $19.50 per hour for arctic testing, what can Precision do to stay competitive?
Transcribed Image Text:Cost-plus and market-based pricing. (CMA, adapted) Precision Laboratories evaluates the
reaction of materials to extreme increases in temperature. Much of the company's early growth was
attributable to government contracts, but recent growth has come from expansion into commercial
markets. Two types of testing at Precision are Heat Testing (HTT) and Arctic-Condition Testing (ACT).
Currently, all of the budgeted operating costs are collected in a single overhead pool. All of the esti-
mated testing-hours are also collected in a single pool. One rate per test-hour is used for both types of
testing. This hourly rate is marked up by 40% to recover administrative costs and taxes and to earn a
profit.
Jeff Boone, Precision's controller, believes that there is enough variation in the test procedures and
cost structure to establish separate costing rates and billing rates at a 40% markup. He also believes
that the inflexible rate structure the company is currently using is inadequate in today's competitive
environment. After analyzing the company data, he has divided operating costs into the following three
cost pools:
$ 500,000
300,000
360,000
$1,160,000
Labor and supervision
Setup and facility costs
Utilities
Total budgeted costs for the period
Jeff Boone budgets 100,000 total test-hours for the coming period. Test-hours is also the cost driver for labor
and supervision. The budgeted quantity of cost driver for setup and facility costs is 600 setup hours. The
budgeted quantity of cost driver for utilities is 9,000 machine-hours.
Jeff has estimated that HTT uses 60% of the test-hours, 20% of the setup-hours, and half the machine-
hours.
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