1.Barry Burgers. Please complete part 3 NPV problem attached.

2. The cost of the personnel department at the Miller Company has always been charged to the production departments based upon number of employees. Recently, opinions gathered from the department managers indicated that the number of new hires might also be a predictor of personnel costs to be assigned. Total personnel department costs are $120,000.

Department Department Department

Cost Driver A B C

Number of employees 300 250 50

The number of new hires 15 25 10

Required:

Using the above data, prepare a report that contrasts the different amounts of personnel department cost that would be allocated to each of the production departments if the cost driver used is

a. number of employees.

b. the number of new hires.

c. Which cost estimation method do you believe Miller Company should use and why? (paragraph is required)

3. Ralph's Mufflers manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply:

Model X Model Y Model Z

Selling price $160 $180 $200

Direct materials 60 60 60

Direct labor ($20 per hour) 30 30 40

Variable support costs ($10 per machine-hour) 10 20 20

Fixed support costs 40 40 40

a. For each model, compute the contribution margin per unit.

b. For each model, compute the contribution margin per machine-hour.

c. If there is excess capacity, which model is the most profitable to produce? Why?

d. If there is a machine breakdown, which model is the most profitable to produce? Why?

e. How can Ralph encourage her sales people to promote the more profitable model?

4. Vision Company sells optical equipment. Blitz Company manufactures special glass lenses. Vision orders 11,400 lenses per year, 200 per week, at $35 per lens. Blitz covers all shipping costs. Vision earns 25% on its cash investments. The purchase-order lead time is 2.5 weeks. Vision sells 225 lenses per week. The following data are available:

Relevant ordering costs per purchase order $41.25

Relevant insurance, materials handling, breakage,

and so on, per year $ 4.50

What is the economic order quantity for Vision?

Barry's Burger Shack Barry's Burger Shack operates a single location at NEU selling burgers, fries and sodas to faculty and students. Revenues for 2014 were $90,000 with profits of $2,250; industry benchmarks suggest profit margins should be close to 10% of revenue. Barry had noticed an increasing number of complaints from customers over the quality of his burgers and the messiness of the soda self service area and has hired you to estimate the cost of quality for his burger business. Your analysis identified the following broad categories of quality costs in 2014: 1 One in 30 customers returned their burgers for a replacement due to burger being too greasy, being served too cool, or served with wrong ingredients; cost to replace was ~$1,600 per year 2 Approximately 5% of burgers have to be scrapped during preparation process at an estimated cost of about $1,200 per year; fries scrap cost about $600 per year 3 Barry uses a mystery shopper service to evaluate employee performance at an annual cost of $600 per year 4 Barry purchased a special grille last year for $8,000 to reduce grease in burgers and to ensure more consistent cooking temperature; Grille has an expected life of 5 years (SL depr.) 5 Barry spent $400 on training his cooking and serving staff 6 A customer sued Barry after finding a bandaid in her burger; Barry settled for $2000. 7 The self service soda area used 6,000 ounces of syrup at a cost of $0.25 per ounce for 5,000 paid sodas; each soda should use 1 ounce of syrup but the excess was spilled 8 Barry, whose annual salary with benefits was $18,000, spent approximately 15% of his time inspecting burger production operations Part 1 Required: Classify the above costs into the 4 categories of cost of quality; calculate the % of revenue for each category and for total cost of quality. What recommendations would you make to Barry based on your analysis to help him improve profitability? Prevention Appraisal Internal Failure 1 Returned burgers External Failure $ 2 Scrapped burgers 1,600 $ 1,600 $ 1,800 $ 600 $ 1,800 3 Mystery shopper $ Total 600 4 Special grille (depr. = $8,000/5) $ 1,600 $ 1,600 5 Training staff $ $ 400 2,000 $ 2,000 $ 250 $ 2,700 3,600 $ 10,950 400 6 Bandaid settlement $ 7 Soda spllage (1,000 oz. * $0.25) $ 8 Barry inspection (15%*$18,000) Total Cost of Quality % Revenue $ 2,700 $ 2,000 $ 3,300 $ 90,000 250 2.2% 3.7% $ 2,050 $ 2.3% 4.0% 12.2% I would recommend Barry spend more on prevention - hygenic training, better soda dispensing equipment, cooking process improvement, etc. If he can reduce his cost of quality by 50%, he will add $5,425 to his profit, bringing him very close to the benchmark 10% of revenue. He should also benchmark quality costs at other fast food operations. Part 2 Barry was thrilled with your initial analysis and, in particular, with your recommendation to improve the cooking process in order to reduce internal failure cost. You observe the cooking process for a few days and identify the following process steps as well as related material costs, labor time, and scrap % at each step: Material Labor Units Labor $/hr Cumul. Scrap Step Process Description $/unit Mins/unit % scrap Started $9.00 Cost Cost 1 Remove/thaw burgers $ 0.75 0.10 0.0% 18934 $0.015 $0.765 $ - 2 If uncooked >24hrs, scrap $ - 0.20 1.0% 18934 $0.030 $0.795 $ 151 3 Cook on grille $ 0.10 1.50 0.0% 18744 $0.225 $1.120 $ - 4 if overcooked, scrap $ - 0.30 1.5% 18744 $0.045 $1.165 $ 328 5 Assemble burger $ 0.30 0.90 0.0% 18462 $0.135 $1.600 $ - 6 Store in heating unit $ - 0.10 0.0% 18462 $0.015 $1.615 $ - 7 If >10 mins in heater, scrap $ - 0.20 2.5% 18462 $0.030 $1.645 $ 759 $ 1.15 3.30 5.0% $0.495 $1.645 $ 1,237 Totals $ Required: Complete the chart above to compute the scrap cost per unit. Assuming Barry sells 18,000 burgers per year, what is his annual cost of scrap? What would you recommend? First you have to compute number of burgers started at each step by starting at the end of the process. So, to get 18,000 good burgers out of the heater, you need to put 18,000/(1-.025) = 18,462 into the heater; then to get 18,462 into the heater, you need to start cooking 18,462/(1-.015) = 18,744 etc. Recommend: Since 2/3 of cost of scrap occurs after burger is fully prepared, Barry needs to do a better job of matching supply to demand by setting maximum quantity in heating unit and training customers to learn they will get a better burger if they don't mind waiting an extra minute or two. Part 3 Next, you focus on reducing external failure cost. You analyze the cost of returned burgers and determine 70% of returns are due to wrong ingredients. You note Barry is using paper slips to send orders to the grille so you do some research and find a point of sale terminal that shows customer what they are ordering and requires grille worker to confirm ingredients before wrapping burger. The new terminal will cost $3,000 with an expected life of 5 years (use SL depr.), but could save 80% of current returns due to wrong ingredients. Required: Compute NPV for the new terminal with 40% tax rate and Barry's cost of capital = Year 0 Initial Cost Year 1 $ (3,000) Projected savings SL Depreciation Pre-tax profit increase less taxes at 40% After tax profit increase Add back depreciation Cash flow Net Present Value $ - Year 2 Year 3 Year 4 Year 5 10%