-41 Activity-Based Management, Non-Value-Added Costs OBJECTIVE 4 resident of May
ID: 355395 • Letter: #
Question
-41 Activity-Based Management, Non-Value-Added Costs OBJECTIVE 4 resident of Mays Electronics, was concerned about the year-end marketing re- unnae had just received. According to Larry Savage, marketing manager, a price decrease that the r was again needed to maintain the company's annual sales voiume of inte- it boards (CBs). This would make a bad situation worse. The current selling price of kept reducing their prices. To match the latest reduction would reduce the price r such a low price? Determined to find out if there were problems with the compa as producing a S2-per-unit profit -half the customary $4-per-unit profit. Foreign 14. This would put the price below the cost to produce and sell it. How could these iom S18 to S1 fens Da nna decided to hire a consul uate the way in which the CBs were pro- r two weeks, the consultant had identified the following activities and costss Setting up equipment Materials handling Inspecting products Engineering support Handling customer complaints Filling warranties Storing goods Expediting goods Using materials Using power Manual insertion labour Other direct labour Total costs S 125,000 180,000 122,000 120,000 100,000 170,000 80,000 75,000 500,000 48,000 250,000 150,000 $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 years sales volume The consultant indicated that some preliminary activity analysis shows that per-unit costs can be at least $7. Since the marketing manager had indicated that the market share (sales r the boards could be increased by 50 percent if the price could be reduced to S12 red uced by ) fo Danna became quite excited Required s activity-based management? What phases of activity analysis did the consultant provide? What else remains to be done y as many non-value-added costs as possible. Calculate the cost savings per unit that realized if these costs were eliminated. Was the consultant correct in his preliminary uction assessment? Discuss actions that the company can take to reduce or eliminate , the non-value-added activities . Calculate te the unit cost required to maintain current market share, while earning a profit of S4 . Now calculate the unit cost required to expand sales by 50 percent. How much cost ted that further activity analysis revealed the following: switching to automated inser save $60,000 of engineering support and S90,000 of direct labour. Now, what al potential cost reduction per unit available from activity analysis? With these on would be required to achieve each unit cost? (Continued)
Explanation / Answer
Key elements included in it are:
a) Identify activities
b) Assess value
c) Retain value-added activities.
The activities were identified by the consultant but didn’t the activities as value or nonvalue-added activities. There were also no suggestions related to enhancing efficiency. Although generalized savings were cautiously identified through removing nonvalue-added activities. Still, the administration must take the decision regarding reducing, be eliminating, be sharing, and be selecting activities to attain cost reductions.
2. Setup - $125,000
Materials handling - 180,000
Inspection - 122,000
Customer complaints - 100,000
Warranties - 170,000
Storing - 80,000
Expediting - 75,000
Total - $852,000
Units sold = $1920000/16 = $120,000
Unit cost reduction = $7.10
The cost reduction estimate was at target. The least per-unit cost reduction is $7, and further reductions may take place once non value-added activities are eliminated.
3. Unit cost for maintaining sales = $14 – $4 = $10
Unit cost for expanding sales = $12 – $4 = $8
Present cost = $16
New Cost reduction for maintaining = $16 – $10 = $6
New Cost reduction for expanding = $16 – $8 = $8
4. Total potential reduction:$ 852,000 + 150,000 = $ 1,002,000
$ 1,002,000÷ 120,000 units
Unit savings = $ 8.35
We knaow that costs to reduced are at least $7, for maintaining current market share. Increasing market share is possible by reducing non-valuable activities. Selection is used here.
5. Present Sales = $ 2,160,000 = $18 × 120,000 units
Costs = 1,920,000
Income = $ 240,000
At $14 price
Sales = $ 1,680,000
Costs = 918,000= $7.65 × 120,000 units
Income = $ 762,000
At $12 price:
Sales = $ 2,160,000
Costs = $1,377,000
Income = $ 783,000
The greatest benefit is incurred at $12 price.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.