Hawk Manufacturing supplies engine parts to Cherokee Cycle Company, a major U.S.
ID: 445036 • Letter: H
Question
Hawk Manufacturing supplies engine parts to Cherokee Cycle Company, a major U.S. manufacturer of motorcycles. Like all of Cherokee’s suppliers, Hawk has always added a healthy profit margin to its cost when quoting selling prices to Cherokee. Recently, however, several companies have offered to supply engine parts to Cherokee for lower prices that Hawk has been charging.
Because Hawk wants to keep Cherokee’s business, a team of Hawk’s managers analyzed their company’s product costs and decide to make minor changes in the company’s manufacturing process. No new equipment was purchase and no additional labor was required. Instead, the machines were reassigned.
To monitor the effectiveness of the changes, Hawk introduced three new performance measures to its information system: inventory levels, lead time (total time reque4re for a part to move through the production process), and productivity (number of parts manufactured per-person per day). Hawk’s goal was to reduce the quantities of the first two performances measures and to increase the quantity of the third.
A section of a recent management report, shown below, summarizes the quantities for each performance measure before and after the changes in the manufacturing processes were made.
Measure
Before
After
Improvement
Inventory in dollars
$21,444
$10,772
50%
Lead time in minutes
17
11
35%
Productivity (parts per person per day
515
1,152
12%
Do you believe that Hawk improve the Quality of its manufacturing process and the quality of its engine parts? Explain your answer.
Can Hawk lower its selling price to Cherokee? Explain your answer.
Did the introduction of the new measure affect the design of the products costing system? Explain your answer.
Do you believe that the new measure caused a change in Hawk’s cost per engine part? If so, how did they cause the change?
Measure
Before
After
Improvement
Inventory in dollars
$21,444
$10,772
50%
Lead time in minutes
17
11
35%
Productivity (parts per person per day
515
1,152
12%
Explanation / Answer
1. Yes, i do believe that the quality of manufacturing process has been improved. This is being reflected in the lower lead time. This means that the production process has become more efficient and more quick. As the time that a part requires to move through the production process comes down to 11 minutes, from the earlier 17 minutes, more parts can be produced in a day, using the same resources of machine and manpower. Reduction in inventory level reflects that Hawk Manufacturing has now a more lean manufacturing process.
2. Yes, Hawk can lower its selling price. This will be possible by lower costs that Hawk will now incur as a result of the changes implemented in its production process. Variable costs like electricity, fuel, etc. will come down. This is because the company will use less machine hours now to produce the same quantity of parts that it was producing earlier. Lower costs will help the company lower its selling price, without affecting its margins.
3. Yes, the new measure will affect the design of the products costing system. Products costing system takes into account costs like direct labor, direct materials, fixed and variable overheads etc. The products costing system should now consider variable costing system to calculate the contribution margin. Contribution margin = Revenues - direct materials - direct labor - variable manufacturing overhead. Fixed costs like fixed manufacturing overhead and fixed selling and administrative expenses should be treates as period costs.
4. Yes, the new measure caused a change in Hawk’s cost per engine part. The new measure will reduce cost per engine part. This is because, the manufacturing has become lean and lead time has reduced. This will result in a decrease in the variable overheads for Hawk. Also, the productivity has increased. This means that the same output can now be produced with fewer manpower. This will reduce the cost of labor and so the direct labor cost will also fall.
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