CableTech Bell Corporation $($CTB$)$ operates in the telecommunications industry. CTB has two divisions: the Phone Division and the Cable Service Division. The Phone Division manufactures telephones in several plants located in the Midwest. The product lines run from relatively inexpensive touch$-$tone wall and desk phones to expensive, high$-$quality cellular phones. CTB also operates a cable TV service in Ohio. The Cable Service Division offers three products: a basic package with $25$ channels; an enhanced package, which is the basic package plus $35$ additional channels and two movie channels; and a premium package, which is the basic package plus $55$ additional channels and six movie channels.

The Cable Service Division reported the following activity for the month of March:

Basic Enhanced Premium

Sales $($units$)50,000500,000300,000$

Price per unit $$32$ $$60$ $$90$

Unit costs:

Directly traced $$6$ $$18$ $$36$

Driver traced $$4$ $$8$ $$12$

Allocated $$20$ $$26$ $$30$

The unit costs are divided as follows: $70$ percent production and $30$ percent marketing and customer service. Direct labor cost is the only driver used for tracing. Typically, the division uses only production costs to define unit costs. The preceding unit product cost information was provided at the request of the marketing manager and was the result of a special study.

Bryce Youngers, the president of CTB$,$ is reasonably satisfied with the performance of the Cable Service Division. March's performance is fairly typical of what has been happening over the past two years. The Phone Division, however, is another matter. Its overall profit performance has been declining. Two years ago, income before income taxes had been about $25$ percent of sales. March's dismal performance was also typical for what has been happening this year and is expected to continue$$ unless some action by management is taken to reverse the trend. During March, the Phone Division reported the following results:

Inventories:

Materials, March $1$ $$23,000$

Materials, March $3140,000$

Work in process, March $1130,000$

Work in process, March $3145,000$

Finished goods, March $1480,000$

Finished goods, March $31375,000$

Costs:

Direct labor $$117,000$

Plant and equipment depreciation $50,000$

Materials handling $85,000$

Inspections $60,000$

Scheduling $30,000$

Power $30,000$

Plant supervision $12,000$

Manufacturing engineering $21,000$

Sales commissions $120,000$

Salary, sales supervisor $10,000$

Supplies $17,000$

Warranty work $40,000$

Rework $30,000$

During March, the Phone Division purchased materials totaling $$312,000.$ There are no significant inventories of supplies $($beginning or ending$).$ Supplies are accounted for separately from materials. CTB$\text{'}$s Phone Division had sales totaling $$1,170,000$ for March.

Based on March's results, Bryce decided to meet with three of the Phone Division's managers: Kim Breashears, divisional manager; Jacob Carder, divisional controller; and Larry Hartley, sales manager. A transcript of their recorded conversation is given next:

Bryce: $$March$\text{'}$s profit performance is down once again, and I think we need to see if we can identify the problem and correct it$$before it's too late. Kim, what's your assessment of the situation?$$

Kim: "Foreign competition is eating us alive$$selling phones at a lower price and high quality. If we could lower our prices by $10$ to $15$ percent, I think that we$$d regain most of our lost market share. But we also need to make sure that the quality of our products meets that of our competitors. We are spending a lot of money each month on inspection, rework, and warranties. I$$d like to see these costs cut by at least $50$ percent. If we could do that by improving quality, then customers would be more satisfied with our products, and we would not only regain our market share but increase it$."$

Larry: $$They$\text{'}$re right. If we could lower our prices by $10$ to $15$ percent, I think that we'd regain most of our lost market share. But we also need to make sure that the quality of our products meets that of our competitors. As you know, we are spending a lot of money each month on rework and warranties. That worries me$.$ I$\text{'}$d like to see that warranty cost cut by $70$ to $80$ percent. If we could do that, then customers would be more satisfied with our products, and I bet that we would not only regain our market share but increase it$.$

Jacob: $$Lowering prices without lowering per$-$unit costs will not help us increase our profitability. I think we need to improve our cost accounting system. I am not confident that we really know how much each of our product lines is costing us$.$ It may be that we are overpricing some of our units because we are overcosting them. We may be underpricing other units.$$

Larry: $$This sounds promising$$especially if the overcosting is for some of our high$-$volume lines.