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ABC, Cycle Time Efficiency & Relevant Costs for Dropping a Product

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ABC and TOC Discuss the similarities and differences between activity-based costing and the theory of constraints, as well as situations in which one approach might be preferable to the other.


Cycle time efficiency and JIT Walker Brothers Company is considering installing a JIT manufacturing system in the hope that it will improve its overall processing cycle efficiency. Data from the traditional system and estimates for the JIT system are presented here for their Nosun Product:

Time Category Traditional System JIT System
Storage 4 hours 1 hour
Inspection 40 minutes 5 minutes
Moving 80 minutes 20 minutes
Processing 2 hours 75 minutes

a. Calculate processing cycle efficiency (PCE) under the traditional and JIT systems for the Nosun Product.

b. Strictly based on your PCE calculations above, should Walker Brothers implement the JIT system? Explain.


Relevant costs: dropping a product Merchant Company manufactures and sells three models of electronic printers. Ken Gail, president of the company, is considering dropping model JT484 from its product line because the company has experienced losses for this product over the past three quarters. The following product-level operating data have been compiled for the most recent quarter (see attached).

In addition, the following information is also available:
- Factory rent and depreciation will not be affected by a decision to drop model JT484.
- Quarterly utility bills will be reduced from $40,000 to $31,000 if JT484 is dropped.
- Supervision costs for JT484 can be eliminated fi dropped.
- The maintenance department will be able to reduce quarterly costs by $7,000 if JT484 is dropped.
- Elimination of JT484 will make it possible to eliminate two administrative staff positions with combined salaries of $30,000 per quarter.

a. Should Merchant Company eliminate JT484?
b. Merchant's sales manager believes that it is important to continue to product JT484 to maintain a full product line. He expects the elimination of JT484 will reduce sales fo the remaining two products by 5% each. Will this information change your answer to (a)? Explain.

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Solution Summary

This solution provides calculations and answers for the three managerial accounting questions in an attached Word document.

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