Business, a publicly traded biotechnology company started production and sales of its main product – cartridges that allow DNA samples for analysis on a microchip. At the beginning of the quarter, sales are difficult to predict, and the company is experiencing fluctuations in output and unpredictable gross profit, which violates the board of directors. Financial staff is investigating whether to accept the new value-based approach to quality. With plenty of spare capacity, the decision on how to apply the potential costs is critical to the company’s management and reporting strategy with analysts.

Work the Youngstown Products numerical example on the following page. (This should takeonly a few minutes and is basically a short refresher on a phenomenon we saw in the Bridgetoncase.)2. The cartridge margins shown in Tables A and B vary from 17% to 65%. What elements of cost account for the difference between the 2000 Actual and 2001 Budget margins in Table A?What elements of cost account for the difference between the margins in the original 2001Budget in Table A versus the revised 2001 Budget in Table B? For each element, why do youthink costs changed between 2000 and 2001 between the original and revised budgets in2001? What would you predict for each cost in the long-run?3. Kelly, Puleski, and Yeltin meet to discuss concerns about both “long-term profitability of thebusiness” and “short-term profitability.” Discuss how well the current standard cost systemshelps the board and analysts distinguish and understand these two issues.4. Suppose sales in 2001 equal 26,000 units, as budgeted in January, and that actualmanufacturing expenses turn out to equal budgeted expenses. What should Daniel Yeltin do to“devise a better way to calculate product costs and gross margins for management decision-making purposes”? (Hint 1: What are the decisions facing management and the board? Hint 2:Consider the suggestion in Activity-Based Costing and Capacity to allocate costs based oncapacity, rather than based on production. What is current cartridge manufacturing capacityaccording to the information in Exhibit 8? What are the costs of providing that capacityaccording to Exhibit 7? What should Daniel Yeltin do with the cost of unused cartridgemanufacturing capacity?)5. Anagene expects demand for 95,000 cartridges in 2002. What changes can Anagene maketo increase capacity to meet higher demand? (See information in the comments column of Exhibit 8 about additional capacity that can be added to the various manufacturing steps.) Assume employees added to increase capacity at any of the various steps cost $100,000 per employee, and assume these costs are treated as part of the overhead cost pool. Under theseassumptions, how will the cost of adding capacity affect the overhead component of cartridgemanufacturing costs