Question

Mason Company manufactures a DVD player called Orlicon. The company sells the player to discount stores throughout the country. This player is significantly less expensive than similar products sold by Mason's competitors, but the Orlicon offers just DVD playback, compared with DVD and Blu-ray playback offered by competitor Riley Manufacturing. Furthermore, the Orlicon has experienced production problems that have resulted in significant rework costs. Riley's model has an excellent reputation for quality. As a result of the actions taken, quality has significantly improved in 2017 while rework and unit costs of the Orlicon have decreased. Mason has reduced manufacturing capacity because capacity is no longer needed to support rework. Mason has also lowered the Orlicon's selling price to gain market share and unit sales have increased. Information about the current period (2017) and last period (2016) follows. (Click the icon to view the information.) a (Click the icon to view additional information.) Read the requirements.

Answer 1

Ans.

1.

(a) unused manufacturing capacity

Amount of unused capacity
Capacity in units of D4H at the beginning of 2017	24,000
Less: Units of D4H produced and sold in 2017	12,000
Unused capacity	12,000
Conversion cost per unit of capacity made available in 2017	$         18.00
Cost of unused capacity	$ 216,000.00

(b) unused selling & customer-service capacity

Amount of unused capacity
Selling & customer service capacity at the beginning of 2017	95
Less: Customers serviced in 2017	83
Unused capacity	12
Cost per unit of capacity made available in 2017	$          210.00
Cost of unused capacity	$      2,520.00

2.

Mason company can reduce Selling & customer service capacity from 95 customers to 85 (95-10) customers.

It could save = 10 * $ 210 = $ 2,100. This is the maximum cost savings from downsizing.

3.

Mason may not eliminate any of its unused selling and customer service capacity because downsizing requires a significant reduction in Selling & customer service capacity. (It is my view but there may be many other different views, if you will think other than take that view.)