Burgandy Corp. is a manufacturer of equipment used in manufacturing. It currentl
ID: 2521074 • Letter: B
Question
Burgandy Corp. is a manufacturer of equipment used in manufacturing. It currently produces a product with 20 parts. Through redesign, it has reduced the number of parts to 8. The current activity capacity and demand for the 20 unit configuration and expected activity demand for the 8 part configuration are provided below:
Materials usage has a rate of $5 per part and no fixed costs. Assembly has a rate of $25 per labor hour with no fixed component. Purchasing requires two clerks that can process 2,000 purchase orders. Each clerk earns $33,000 per year. There is also a $2 per order processing cost.
What are the savings in materials usage cost with the new design changes?
a. $820,000
b. $780,000
c. $120,000
d. $750,000
Activities Activity Driver Activity Capacity CurrentActivity Demand Expected
Activity Demand Materials usage Number of parts 250,000 250,000 100,000 Assembling parts Direct labor hours 15,000 15,000 6,000 Purchasing parts Number of orders 18,000 14,000 7,000
Explanation / Answer
Answer
d ) 750000
material usage = ( 250000 - 100000 ) * 5
= 750000
assembly = ( 15000 - 6000 ) * 25
= 225000
salary of clerks = 33000 * 2
= 66000
order processing cost = 7000 * 2
= 14000
total savings = 750000 + 225000 + 66000 + 14000
= 1055000
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