1. How do you compute budgeted cost per part? For example,
   1. Cost per part using previous cost system
   2. Cost per part using proposed new system
2. How to do variance analysis to explain why actual results differ from the budgeted amounts
3. How to do you make a budgeted operating income statement
4. How to figure out breakeven point on the new equipment?
5. If capacity for machine setups is 120,000 per year, what should the transfer price be?

Neptune Networks, Inc. The amount Neptune generated on its contract with DHS in 2021 was simply staggering and really stood out among its industry competitors! One has to wonder whether this has something to do with the fact that Neptune's CEO is politically well connected and has doled out hundreds of thousands of dollars in political contributions to both parties in Congress. Excerpts from the December 31, 2021 issue of DMV Post Neptune Networks, headquartered in Alexandria, VA, is a USbased network component manufacturer. It was founded in 1957 by Dr. Scott Pope, an engineering professor at the George Washington University. Over the years, it has become a wellestablished networking supplier in many areas of homeland security. It consists of three departments: Civilian Networking Components (CN C), Military Networking Components (MN C) and Engineering (S: Tooling (ET). CN C produces and supplies networking components for business networking and business security needs. CN C customers are typically located in big cities, close to N eptune's ET offices. CNC operates in a fairly competitive market; almost all of its products are considered \"standard" in the industry. Thus, it prices its products using the market prevailing rates. Business typically update networks on a predicable schedule. Business typically place orders for parts several months in advance which gives Neptune plenty of time to schedule production and oftentimes enables Neptune to combine orders from different airlines into a single production run. MNC is a defense contractor and produces certified networking components exclusively for the US Customs and Boarder Control, Federal Emergency Management Agency, Transportation Security Administration, US Coast Guard (DHS). MNC locations are scattered around the United States to better serve the various DHS locations. NINC's products are uniquely researched and developed in house and protected by patents. MNC charges DHS a price equal to full cost plus a negotiated margin. In order to become more nimble, DHS moved to a JIT system which requires Neptune to produce parts on short notice and in small batches. Because emergencies are infrequent and unexpected, DHS requires a quick response from Neptune. Consequently, ET must store large quantities of raw materials to ensure it is ready if an emergency arises. Furthermore, emergency response network equipment usually operate in harsh conditions. As such, Neptune must test parts extensively under simulated conditions to ensure quality. Finally, ET provides manufacturing support to both CN C and MNC that includes machine setup, inventory management, quality control, and customer service. Neptune is currently mired in a public relations quagmire. In December 2021, DMV Post, a widely read and respected local newspaper, ran a scathing article accusing Neptune of excessively charging DHS a hef-ty sum for parts and making a big profit at tax payers' expense. Neptune has been working hard to restore its image and anticipated that the public would scrutinize its financials. Existing Cost System at Neptune The existing cost system at Neptune calculates costs for CNC and MNC. Costs at CNC and MNC include direct labor and direct materials. The direct labor and direct materials costs are variable costs varying with the volume of parts. Costs at ET are treated as overhead and allocated to CNC and MNC based on the total number of parts. Costs at ET include machine setup, inventory management, quality control, and customer service. The budgeted operating income statement for Neptune in 2022 is provided in Exhibit 1. The expected volume of parts for CNC and MNC is 800,000 and 400,000, respectively. A New Cost Study William Pope, a Senior Vice President of Neptune, is concerned with the high budgeted cost at CNC in 2022 and wonders whether more time and attention should focus on the DHS business. To more precisely assess each department's performance, in January 2022 Mr. Pope hired an outside consultant to conduct a new cost study which reveals the following information. I. NIachine setup costs are generally incurred as the production line is being prepared. These costs do not related to the size of the production run or the type of network. Rather, the costs seem to vary with the number of setups. 2. Inventory management costs refer to the costs incurred in storing raw mate rials. The costs seem to be caused by weight time. Weight time is an item's weight (by pounds) multiplied by the length of time the item stays in ET's warehouse. Both the length of time that inventory is stored and the weight of the item impact the inventory cost incurred by Neptune. 3. Quality control costs appear to be driven by the number of tests conducted. More sophisticated network components require more testing. This driver seems to proxy for testing sophistication. 4. Customer service costs are incurred when Neptune sends its service personnel to its customers for emergency repairs. These costs seem to be primarily related to the number of travel miles. 5. The direct labor and direct materials costs at CNC and MNC are evaluated the same as in the existing system; these are variable costs varying with the volume of parts. Exhibit 2 contains some of the operating data the consultant projected for 2022. William Pope understood that the pricing of MNC parts would be affected by any change in Neptune's cost system during 2022 (while the negotiated margin would remain the same). Recent Developments ET's quality control service recently purchased a piece of testing equipment, called High Capacity Network Throughput Probe (HCNTI'), that detects latency issues. It intends to offer this machine to be used by external customers only. The machine's useful life is 1 year and its capacity is 400 tests,- its fixed cost (including acquisition cost) is $1,000,000; its variable cost is $5,000 per test. Three businesses have expressed interest in using this machine. Combined, these three customers plan to conduct 200 tests. Neptune expects to charge a 111% margin on its \"reasonable" cost of serving these customers but is struggling with how to determine what constitutes a \"reasonable" cost. The actual number of parts sold in 2022 is 1,250,000 and 300,000 for CNC and MNC, respectively. Exhibit 3 provides data on budgeted and actual direct materials costs in 2022. Neptune is also in the process of compiling its budget for 2023. 20% of machine setup costs and 40% of quality control costs are fixed, while all other ET costs are fixed. Exhibit 4 contains some of its projections for 2023. Exhibit 1: 2022 Budgeted Operating Income Statement Revenues 3,600,000,000 Costs Direct Labor 300,000,000 Direct Materials 600,000,000 Machine Setup 270,000,000 Inventory Management 500,000,000 Quality Control 600,000,000 Customer Service 200,000,000 Operating Profit 1,130,000,000 Exhibit 2: Operating Data for 2022 CNC MNC Number of Setups 30,000 60,000 DM Inventory Weight by Pounds 500,000 250,000 Days in DM Inventory 10 40 Number of Tests 1,000,000 4,000,000 Travel Miles 500,000 4,500,000Exhibit 3: Budgeted and Actual Direct Materials Usage in 2022 Budgeted Actual I Price r 1]: DM Dollars Price r 1b DM Dollars CNC 200 400,000,000 150 30,000,000 I'd-NC 000 200,000,000 500 130,000,000 Total 600,000,000 930,000,000 Exhibit 4: 2023 Budget Assumptions Revenues 4,000,000,000 Direct Labor Cost 400,000,000 Direct Material Cost 550,000,000 Number of Parts (in total) 1,000,000 Number of Selu 99,000 Number of Tests 6,000,000 Travel Miles 4,000,000