Flower Pharmaceuticals
Case Study: Flower Pharmaceuticals
A. The table below lists each category and states whether the cost is relevant, if it is an implicit or explicit cost, and if the cost has been properly calculated (note: company is currently operating at 65% capacity). Cost category | Relevant | Implicit/Explicit | Calculated correctly? | Fully allocated capital cost1 | N | Explicit | Y | Direct labor cost2 | Y | Explicit | Y | Materials Purchased3 | Y | Explicit | Y | Materials Inventoried4 | Y | Implicit | N: 25,000 lbs x $9/per lb = $225,000 | Managerial overhead5 | N | Implicit | Y | Profit margin6 | N | Implicit | Y |
1. Fully allocated capital cost * Relevant— This cost is not relevant since it cannot be avoided if the company decides against this project. * Explicit—This cost is explicit since it is an out of pocket cost that the company would pay regardless of whether or not they accepted the project. * Calculated correctly—Yes. 2. Direct labor cost * Relevant—Yes. This cost is relevant to the project since it can be avoided by not undertaking the project. * Explicit— This cost is explicit since it is an out of pocket cost that the company would pay regardless of whether or not they accepted the project (i.e.—hire back the workers, or keep paying the workers severance). * Calculated correctly—Yes. 3. Materials Purchased * Relevant— Yes. This cost is relevant to the project since the company can avoid using the materials by not undertaking the project. * Explicit—This is an out of pocket cost that the company would have to pay for to take on the project to purchase additional materials. * Calculated correctly—Yes. 4. Materials Inventoried * Relevant— Yes. This cost is relevant to the project since the company can avoid using the materials by not undertaking the project. * Implicit—The company is not spending additional money to acquire the powder
A. The table below lists each category and states whether the cost is relevant, if it is an implicit or explicit cost, and if the cost has been properly calculated (note: company is currently operating at 65% capacity). Cost category | Relevant | Implicit/Explicit | Calculated correctly? | Fully allocated capital cost1 | N | Explicit | Y | Direct labor cost2 | Y | Explicit | Y | Materials Purchased3 | Y | Explicit | Y | Materials Inventoried4 | Y | Implicit | N: 25,000 lbs x $9/per lb = $225,000 | Managerial overhead5 | N | Implicit | Y | Profit margin6 | N | Implicit | Y |
1. Fully allocated capital cost * Relevant— This cost is not relevant since it cannot be avoided if the company decides against this project. * Explicit—This cost is explicit since it is an out of pocket cost that the company would pay regardless of whether or not they accepted the project. * Calculated correctly—Yes. 2. Direct labor cost * Relevant—Yes. This cost is relevant to the project since it can be avoided by not undertaking the project. * Explicit— This cost is explicit since it is an out of pocket cost that the company would pay regardless of whether or not they accepted the project (i.e.—hire back the workers, or keep paying the workers severance). * Calculated correctly—Yes. 3. Materials Purchased * Relevant— Yes. This cost is relevant to the project since the company can avoid using the materials by not undertaking the project. * Explicit—This is an out of pocket cost that the company would have to pay for to take on the project to purchase additional materials. * Calculated correctly—Yes. 4. Materials Inventoried * Relevant— Yes. This cost is relevant to the project since the company can avoid using the materials by not undertaking the project. * Implicit—The company is not spending additional money to acquire the powder