Question

Value-Added and Non-Value-Added Costs, Unused Capacity

For Situations 1 through 6, provide the following information:

1. An estimate of the non-value-added cost caused by each activity. If required, round your final answer to the nearest dollar.
2. The root causes of the activity cost (such as plant layout, process design, and product design).
3. The appropriate cost reduction measure: activity elimination, activity reduction, activity sharing, or activity selection.

Choose " Multiple" in the Root cause column, wherever there is more than one root cause.

1. It takes 36 minutes and eight pounds of material to produce a product using a traditional manufacturing process. A process reengineering study provided a new manufacturing process design (using existing technology) that would take 6 minutes and 5 pounds of material. The cost per labor hour is $12, and the cost per pound of material is $11.
2. With its original design, a product requires 13 hours of setup time. Redesigning the product could reduce the setup time to an absolute minimum of 26 minutes. The cost per hour of setup time is $160.
3. A product currently requires five moves. By redesigning the manufacturing layout, the number of moves can be reduced from five to zero. The cost per move is $10.
4. Inspection time for a plant is 15,000 hours per year. The cost of inspection consists of salaries of four inspectors, totaling $100,000. Inspection also uses supplies costing $10 per inspection hour. A supplier evaluation program, product redesign, and process redesign reduced the need for inspection by creating a zero-defect environment.
5. Each unit of a product requires sixteen components. The average number of components is 16.3 due to component failure, requiring rework and extra components. By developing relations with the right suppliers and increasing the quality of the purchased component, the average number of components can be reduced to five components per unit. The cost per component is $700.
6. A plant produces 1,500 different electronic products. Each product requires an average of 22 components that are purchased externally. The components are different for each part. By redesigning the products, it is possible to produce the 1,500 products so that they all have 11 components in common. This will reduce the demand for purchasing, receiving, and paying bills. Estimated savings from the

1. reduced demand are $1,350,000 per year.

Case	Non-Value-Added Cost		Root Cause	Cost Reduction
1	$	per unit	Process design	Activity selection
2	$	per setup	Product design	Activity reduction
3	$	per unit	Plant layout	Activity elimination
4	$	per year	Multiple	Activity elimination
5	$	per unit	Suppliers	Activity selection

Break-Even Units: Units for Target Profit

Jay-Zee Company makes an in-car navigation system. Next year, Jay-Zee plans to sell 16,000 units at a price of $320 each. Product costs include:

Direct materials	$68
Direct labor	$40
Variable overhead	$12
Total fixed factory overhead	$500,000

Variable selling expense is a commission of 5 percent of price; fixed selling and administrative expenses total $116,400.

Required:

1. Calculate the sales commission per unit sold.
$ per unit

Calculate the contribution margin per unit.
$ per unit

2. How many units must Jay-Zee Company sell to break even?
units

Answer 1

1) Sales commission per unit sold ($320*5/100)	$16 per unit
Contribution margin per unit:
Selling prie per unit	$320
Less: Variable cost per unit:
Direct materials	($68)
Direct labor	($40)
Variable overhead	($12)
Variable commision per unit	($16)
Contribution margin per unit	$184
2) Break-even in units:
Total Fixed factory overheads	$500,000
Add: Total fixed selling and administrative expenses	$116,400
Total Fixed Expenses (a)	$616,400
Contribution margin per unit (b)	$184
Break-even point in units (a/b)	3,350