RTM Technology is an American technology company with several divisions. One division, Sacramento Division, manufactures and sells network components. Sacramento currently sells a single product, an ethernet repeater. Assume you are the division manager of Sacramento Division. You have accumulated your product’s cost data from the last six months of Fiscal Year X1 (FYX1) to use as the basis for your operating plans for the coming year, Fiscal Year X2 (FYX2). Your division’s FYX1 cost data is in the Excel file, “ACC 222 – DDJDM Data – Fall 2022”, which is on Canvas under Files – Data-Driven JDM Project. Assume your division’s manufacturing facility has the capacity to produce 500,000 ethernet repeaters annually.

Requirement 1: Forecasting manufacturing costs

Using your division’s FYX1 cost data in the “ACC 222 – DDJDM Data – Fall 2022” file, estimate your division’s cost function and use it to predict your division’s manufacturing costs for the coming year. (Round all dollar amounts to two decimal places.)

a. Based on the cost data provided, what is your division’s manufacturing cost function using the high-low method assuming the best cost driver for manufacturing costs is direct labor hours? (HINT: Since cost data are provided monthly, create a table that sums total manufacturing cost – DM, DL, and OH – and total direct labor hours for each month to identify the high and low data points for your analysis.) (1 point)

21.4x + 762.891.75

b. Based on your high-low cost function, what is your division’s estimated monthly fixed manufacturing cost for the coming period? What is your estimated variable manufacturing cost per direct labor hour? (1 point)

VC = the slope is is 21.4

FC = 762,891.75

c. What is your division’s cost function using regression analysis assuming the best cost driver for your division is still direct labor hours? To estimate your cost function using regression, you can use the regression data analysis tool in Excel. Round your intercept and slope coefficients to two decimal places. (HINT: You can find lots of helpful Excel regression tutorials online if you search for “Excel regression”. Your Y range will be total cost and your X range will be direct labor hours.) (1 point)

d. Based on the results of your regression analysis, what is your division’s estimated monthly fixed manufacturing cost for the coming period? Estimated variable manufacturing cost per direct labor hour? (1 point)

e. Using the results of your regression, estimate your division’s total manufacturing cost for the first month of FYX2 assuming you expect to use 21,500 direct labor hours in this month. (1 point)

Requirement 2: Single-product CVP

Assume the following additional cost data are available for FYX1 for ethernet repeaters:

Selling price per unit $360.00

Average variable cost per unit

Direct materials $82.70

Direct labor $40.00

Manufacturing overhead $29.60

Selling expense $20.50

Annual total fixed costs

Manufacturing overhead $8,500,000

Selling expense $2,250,000

Administrative expense $2,250,000

As a result of changes in macroeconomic conditions, you expect the cost of direct labor to increase 18% in FYX2. Fixed administrative costs are also expected to increase in FYX2 by $300,000 due to salary increases. All other costs and expenses are expected to remain the same as in FYX1. Your division’s operating income target for FYX2 is $2.5 million.

If your division experiences the cost increases described, then how many ethernet repeaters will you need to sell in FYX2 to break even? (Round your answer to the nearest whole unit.) (1 point)

= 73,889 repeaters

b. If your division experiences the cost increases described above, then what is the total sales revenue (in dollars) you will need to achieve in FYX2 to earn your division’s target operating income of $2.5 million? (1 point)

= $31,600,000

Requirement 3: Multi-product CVP

To diversify your division’s product mix, you are considering expanding your product line in the coming year by introducing a second product, a standard router. Projected revenue and cost data for the router are as follows:

Selling price per router $300.00

Variable costs per router

Direct materials $25.50

Direct labor $27.50

Manufacturing overhead $30.00

Selling expenses $7.00

If you decide to introduce this router in FYX2, then no additional manufacturing facilities or capacity would be required. Fixed advertising costs, however, would increase by $125,000 to promote both ethernet repeaters and routers. Your company’s marketing department estimates one router would be sold for every three ethernet repeaters during the new product’s introductory phase, which is expected to span the next 18 months.

a. If your division introduces this router, maintains the current selling price of $360 per unit for ethernet repeaters, and experiences the cost changes described in Req. 2, then how many units of each product would your division need to sell to break even in the coming year?

i. Break-even (in units) of ethernet repeaters: 53,700 (1 point)

ii. Break-even (in units) of routers: 17,900 (1 point)

iii. Total break-even sales (in combined units): 24,409,090.91 (1 point)

Requirement 4: KMB Technology special order

Assume your division chose to introduce routers in FYX2 (as described in Requirement 3). You have been approached by a new customer, KMB Technology, to fulfill a one-time special order for a modified version of your division’s router that would require special materials and a modified production process. KMB wants to purchase 10,000 units of this special router at $150 per unit. Your division has enough excess capacity to produce the modified router for KMB without interfering with existing business. The materials required for this special order will cost 20% more than materials for the standard router and a new machine that costs $210,000 will be required. Otherwise, all manufacturing costs would be the same as the costs to produce routers for regular customers (as described in Requirement 3). Assume the new machine required for this special order has no alternate uses and no salvage value. No sales commissions would be paid on this special order.

Your first reaction to this special order is negative because KMB wants to pay significantly less than the $300 selling price regular customers pay for standard routers. Additionally, this special router would be costlier to produce because it requires more expensive materials and an expensive new machine. If this modified router is costlier to produce and KMB pays a lower price, then this deal might not be profitable for your division.

a. What will be the change in your division’s operating income if you accept KMB Technology’s special order? (1 point)

= An increase in operating income of $409,000

b. What is the lowest selling price per unit you should accept for this modified router for KMB Technology? (1 point)

= $109.1

Requirement 5: Performance evaluation

Assume you are at the end of FYX2 and your division chose to introduce the new product, routers, during the year as described in Requirement 3. Operating results by quarter for FYX2 are included in the project data file in the “Operating Results FYX2” worksheet. These operating results reflect revenues and expenses for ethernet repeaters and routers in FYX2 but do not reflect KMB Technology’s special order from Requirement 4 (i.e., the data provided reflect FYX2 revenues and expenses for ethernet repeaters and standard routers only).

Assume your division’s average investment in operating assets for FYX2 (not including the asset purchase required for the KMB Technology special order) was $84.5 million.

What is your division’s return on sales for FYX2 without the KMB Technology special order? (1 point)

= 0.2028

What is your division’s return on investment for FYX2 without the KMB Technology special order? (1 point)

What is your division’s residual income for FYX2 without the KMB Technology special order? (Assume the minimum required rate of return on investment in assets for your division is 11%.) (1 point)

= $3,380,00

d. Now assume you accepted KMB Technology’s special order as described in Requirement 4. Based on your analysis in Requirement 4, how did the special order affect your division’s ROS, ROI, and residual income?

ROS (with KMB order) 0.2044 (1 point)

ROI (with KMB order) 0.1545 (1 point)

Residual income (with KMB order) $3,765,900 (1 point)

Requirement 6: Management’s analysis of FYX2 operating results

Write a brief summary (no more than 2 paragraphs) of your division’s FYX2 operating results for your company’s Chief Financial Officer and discuss your division’s performance assuming you accepted the KMB Technology special order. Was accepting the special order the right decision? (2 points)

Accepting the order was the right decision based on KMB’s special order and the financial advantage of $409,000. Furthermore, using the performance evaluation, Return on Sales increased to 0.2044 when we accepted the special order. The same thing happened when we accepted the special order for Return on investment when it increased from 0.15 to 0.1545. Residual income also so increased of $385,900 when accepting the special order.

The variable cost was the only thing to change while fixed cost remained the same throughout all four quarters. This would then affect both the operating income and CM for quarter 4 especially. The increase in both CM and OI can be attributed to the decrease in variable cost in comparison from quarters 1 to 4. Quarter 1’s variable cost was 1,060,115 higher than quarter 4.