Question

Danna Martin, president of Mays Electronics, was concerned about the end-of-the year marketing report that she had just received. According to Larry Savage, marketing manager, a price decrease for the coming year was again needed to maintain the company's annual sales volume of integrated circuit boards (CBs). This would make a bad situation worse. The current selling price of $18 per unit was producing a $2-per-unit profit—half the customary $4-per-unit profit. Foreign competitors kept reducing their prices. To match the latest reduction would reduce the price from $18 to $14. This would put the price below the cost to produce and sell it. How could these firms sell for such a low price? Determined to find out if there were problems with the company's operations, Danna decided to hire a consultant to evaluate the way in which the CBs were produced and sold. After two weeks, the consultant had identified the following activities and costs:

Activities	Costs
Setting up equipment	$125,000
Materials handling	180,000
Inspecting products	122,000
Engineering support	120,000
Handling customer complaints	100,000
Filing warranties	170,000
Storing goods	80,000
Expediting goods	75,000
Using materials	500,000
Using power	48,000
Manual insertion labor*	250,000
Other direct labor	150,000
Total costs**	$1,920,000

* Diodes, resistors, and integrated circuits are inserted manually into the circuit board. ** This total cost produces a unit cost of $16 for last year’s sales volume.

The consultant indicated that some preliminary activity analysis shows that per-unit costs can be reduced by at least $7. Since the marketing manager had indicated that the market share (sales volume) for the boards could be increased by 50% if the price could be reduced to $12, Danna became quite excited.

Question 4

Activity-Based Management, Nonvalue-Added Costs

4. Assume that further activity analysis revealed the following: Switching to automated insertion would save $60,000 of engineering support and $90,000 of direct labor. (a) Now what is the total potential cost reduction per unit available from activity analysis? (b) With these additional reductions, can Mays achieve the unit cost to maintain current sales? To increase it by 50%? (c) What form of activity analysis is this: reduction, sharing, elimination, or selection? Round your answers to two decimal places.

(a) The unit savings, based on the assumption, is _____.

	(b) Can Mays achieve the unit cost to maintain current sales? Choose: Yes/No
	Can Mays achieve the unit cost to increase sales by 50%? Choose: Yes/No

(c) What form of activity analysis is this? Choose One: Elimination/Selection/Reduction/Sharing

Answer 1

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Setup	$      125,000
Materials handling	$      180,000
Inspection	$      122,000
Customer complaints	$      100,000
Warranties	$      170,000
Storing	$         80,000
Expediting	$         75,000
Total Cost reduction as per consultant	$      852,000
Cost reduction from Automation	$      150,000
Total Cost Reduction	$   1,002,000
Reduction per unit ($1,002,000/120,000)	8.3500
Costs can be reduced by at least $7, enabling the company to maintain current market share
Further, if all the nonvalue-added costs are eliminated, then the cost reduction needed to increase market share is also possible.
Activity selection is the form of activity management used here.