Question

Apply the Concepts Kramer Company currently produces a high-tech medical product with 20 parts. Design engineering has produced a new configuration for the product that requires only eight parts. Current activity capacity and demand (20-part configuration) and expected activity demand (8-part configuration) are provided. Activity Capacity Current Expected Activity Activity Demand Demand Activities Activity Driver Material usage Number of parts 300,000 300,000 15,000 7,500 Assembling parts Direct labor hours 15,000 15,000 Purchasing parts Number of orders 20,000 15,000 9,750 Additionally, the following activity cost data are provided: Material usage: $3 per part used; no fixed activity cost. Assembling parts: $12 per direct labor hour; no fixed activity cost. Purchasing parts: Four salaried clerks, each earning a $30,000 annual salary; each clerk is capable of processing 5,000 purchase orders. Variable activity costs: $0.50 per purchase order processed for forms, postage, etc. 1. Calculate the cost reduction produced by the new design (round to the nearest dollar). Cost reduction 2. Suppose that 15,000 units are being produced and sold for a current price of $450 per unit and that the price per unit will be reduced by the per unit savings. The new price for the eight-part configured product is (round to the nearest cent): New price $ 3. What if the expected activity demand for purchase orders was 4,600? Calculate the effect on the answers in Requirements 1 and 2 (round your cost reduction to the nearest dollar and new price to the nearest cent): Cost reduction New price Exploiting External Linkages: Supplier and Customer Linkages Linkages with activities external to the firm can also be exploited. External linkages are of two types: supplier linkages and customer linkages. A firm must carefully choose its suppliers, selecting those whose quality, reliability, and delivery performance are acceptable. For cost management, a broader view of component cost is needed. Activity-based supplier costing uses drivers to trace costs associated with quality, reliability, and late deliveries to individual suppliers and adds these costs to the direct purchase costs. This enables managers to improve their evaluation and selection of suppliers, with the objective of reducing total supplier costs. On the other hand, activity-based customer costing assigns the costs of customer-caused activities to individual customers or customer types. Customers can then be classified as profitable or unprofitable (or as causing or not causing inefficiencies), and actions can be taken to improve efficiency and profitability. The activity-based costing procedures follow those used for products: activity rates are calculated and activity costs are assigned by multiplying the rates by the amount of activity consumed by the cost object-the only difference is that the cost object has changed from products to either suppliers or customers.

Answer 1

Requirement 1: Compute total cost savings as follows

Particulars	Amount
Materials ((300,000 − 15,000) × $3)	$855,000
Assembling Parts ((15,000 − 7,500) × $12)	$90,000
Purchasing Parts (((15,000 − 9,750) × $0.50) +$30,000)	$32,625
Total cost reduction	$977,625

Requirement 2: Compute new selling price as follows

Particulars	Amount
Current price	$450.00
Deduct: Cost reduction per unit ($977,625 ÷ 15,000 units)	$65.18
New selling price per unit	$384.83

Requirement 3: Compute cost savings and new selling price as follows

Particulars	Amount
Materials ((300,000 − 15,000) × $3)	$855,000
Assembling Parts ((15,000 − 7,500) × $12)	$90,000
Purchasing Parts (((15,000 − 4,600) × $0.50) + $30,000 + $30,000)	$65,200
Total cost reduction	$1,010,200

Compute new selling per unit as follows

Particulars	Amount
Current price	$450.00
Deduct: Cost reduction per unit ($1,010,200 ÷ 15,000)	$67.35
Net selling price per unit	$382.65