# Monroe Clock Company (A) Case Solution

Solution Id Length Case Author Case Publisher
1064 1934 Words (8 Pages) Luann J. Lynch Darden School of Business : UV1331
This solution includes: A Word File and An Excel File

Monroe Clock Company is introducing a new product in the market and Jim Monroe is concerned about its price as traditional costing has shown that the price will be substantially high than the competitor’s prices. Revised estimates indicate that the retail price will actually be quite low. The contribution analysis shows that the company needs to sell 25547 units at \$14.7 in order to equalize the total margin for \$8 factory price. ABC costing has yielded factory price and retail price of \$10.6 and \$ 26.91 respectively. It is recommended that the company should employ activity-based costing alongside eliminating the fixed cost drivers as pointed out by Frank.

## Following questions are answered in this case study solution

1. What are the key concepts or issues in this case?

2. Examine Tom Grant’s calculation of the \$11.60 for the new household timer included in Exhibit l, then explain why Frank Tyler adjusted Tom’s calculation of \$11.60 to get \$6.30

3. What volume (in units) would have to be sold at \$14.70 factory price in order for Monroe to receive the same total contribution if Monroe sold 50,000 units at \$8.00. Given the only variable overhead cost is \$2.00 per Exhibit 2.

i. Re-compute the new household timer’s cost on a fully allocated basis.

ii. Compare your answer to the amount (\$11.60) on Exhibit l. What is the difference?

iii. With the new timer cost computed in item #4 (a) above on page #2, recalculate the new timer’s retail selling price using the same process used by Frank Tyler to calculate a retail price of \$29.36.

iv. Explain the difference between traditional costing system versus Activity-based costing system when allocating overhead costs. Relate your answer to Exhibit l and your computation in item #4 above.

v. Which allocation method do you recommend? and Why?

## Case Analysis for Monroe Clock Company (A)

#### 1. What are the key concepts or issues in this case?

The main topic of the case, which encompasses all concepts, is the costing of the new electrical timer device. Firstly, there is an issue of fixed vs. variable cost handling. According to Jim Monroe, the president of the company, a significant portion of the cost is fixed and hence it is not relevant in cost computation and appraisal. Secondly, the issue of overhead allocation also arises. The company uses traditional absorption-based costing that allocates a single amount of overhead. The company also wants to compute the cost on the basis of activity-based costing. Thirdly, the company wants to make a decision regarding the costing method and the final cost of the household timer.

#### 2. Examine Tom Grant’s calculation of the \$11.60 for the new household timer included in Exhibit l, then explain why Frank Tyler adjusted Tom’s calculation of \$11.60 to get \$6.30.

The calculations for costing constitute four components, direct material (or purchased parts), direct labor, expend. Supplies and the overhead. The amounts related to material, labor, and expended supplies are fairly constant. However, the overhead allocation is done on the basis of one driver, direct labor. Tom Grant applied the traditional absorption costing technique to arrive at the factory cost. Additionally, the calculations of Tom Grant take into consideration both the fixed and variable factors in the overhead allocation. There are two types of cost allocations, one for the standard product and one for the additional features required to manufacture the product. There are two overhead figures for each allocation. Frank Tyler views that there are certain elements in the overhead allocation that are predominantly fixed in their cost nature. This applies that the cost related to these elements is permanent and it does not change in relation to the overall level of production. Fixed costs are only relevant when they are avoidable. In the current scenario, no considerable capital is required to start production. Hence, in consideration of their innate nature (they cannot be avoided), the existing fixed costs should not be included in the cost of a new product. Based on this logic, Frank Tyler separated the overhead items that are fixed and excluded them from the computations. By carrying out the relevant calculations, this was found that only \$2 cost was variable. Therefore, he excluded the remaining overhead cost (\$7.3-\$2 =\$5.3). After that, the standard increments to the costs were applied and the revised factory price was computed to be \$8.

#### 3. What volume (in units) would have to be sold at \$14.70 factory price in order for Monroe to receive the same total contribution if Monroe sold 50,000 units at \$8.00. Given the only variable overhead cost is \$2.00 per Exhibit 2.

The total contribution unit can be computed by applying the following formula:

Total Contribution Margin = Total Revenue - Total Variable Costs

This formula can be expanded and simplified to as follows:

Total Contribution Margin = (Retail Selling Price * Units Sold) - (Variable Cost Per Unit * Units Sold)

Total Contribution Margin = Units Sold * ( Retail selling Price * Per Unit Variable Cost)

The difference between the retail selling price and per unit variable costs is also known as the ‘unit contribution margin’. For the case of \$8 factory price, the retail selling price comes out to be \$16. Consequently, the unit contribution margin stands at \$14. For 50000 units, the total contribution of the product stands at \$700,000. Now, for the second scenario, the factory price is \$14.7 which implies that the retail selling price of the product will be \$29.4. At this amount, the unit contribution margin comes out to be \$27.4. In order to find the number of units that create \$700,000 in the total contribution, one needs to divide this number by the unit contribution margin. The calculation outputs the number of units to be 25547. Therefore, at a factory price of\$14.7, Monroe needs to sell 25547 units in order to ensure a contribution margin that is equal to \$700,000. The detailed calculations are shown in table 1.

 Contribution Margin Calculations Standard Case Revised Case Formula Used Amount Formula Used Amount Units Given 50000 Units Total Contribution/Contribution per Unit 25547 Factory Price Given \$            8.00 Factory Price Given \$          14.70 Whole Sales and Retail Costs 50% of Selling Price \$            8.00 Whole Sales and Retail Costs 50% of Selling Price \$          14.70 Retail Selling Price Factory Price + Retail Costs \$          16.00 Retail Selling Price Factory Price + Retail Costs \$          29.40 Variable Price Per Unit Given \$            2.00 Variable Cost Per Unit Given \$            2.00 Contribution Per Unit Retail Selling Price-Variable Price Per Unit \$          14.00 Contribution Per Unit Retail Selling Price-Variable Price Per Unit \$          27.40 Total Contribution Contribution Per Unit*Units \$ 700,000 Total Contribution Contribution Per Unit*Units \$ 700,000

Amount to Pay

## Calculate the Price

Approximately ~ 1 page(s)

## \$0

### Get More Out of This

Our essay writing services are the best in the world. If you are in search of a professional essay writer, place your order on our website.

### Get Help in 35+ Services ## Hi there !

We are here to help. Chat with us on WhatsApp for any queries. 