Caterpillar's Rising Material Costs

Background Tariffs on foreign metals, specifically a 25% tariff on steel and a 10% tariff on aluminum, are increasing Caterpillar’s expenses. Caterpillar estimates that they will lose approximately $200 million in profit if nothing is done to combat the rising cost of materials.

Multiple Choice Questions 1. Steel is a primary component used by Caterpillar in producing bulldozers. How would Caterpillar classify the cost of steel? a. Variable cost b. Period cost c. Fixed cost d. Factory overhead

Multiple Choice Questions 2. Caterpillar reports the following for the current year:       Finished goods inventory, beginning of year    $4.6 billion       Finished goods inventory, end of year               $4.8 billion       Cost of goods sold                                                 $32.3 billion Using this information, calculate Caterpillar’s cost of goods manufactured for the current year. a. $9.4 billion b. $32.1 billion c. $32.5 billion d. $22.9 billion

Discussion Questions 3. Discuss why Caterpillar classifies some of its materials used in production, such as screws, bolts, washers and nuts, as indirect costs instead of as direct costs. 4. Suppose Caterpillar has a maintenance team for each of its product lines. Each maintenance team provides service for only one product line. Discuss whether the labor costs from each maintenance team would be considered direct labor or indirect labor.