Question

Exploiting Internal Linkages

Woodruff Company is currently producing a snowmobile that uses five specialized parts. Engineering has proposed replacing these specialized parts with commodity parts, which will cost less and can be purchased in larger order quantities. Current activity capacity and demand (with specialized parts required) and expected activity demand (with only commodity parts required) are provided.

Activites	Activity Driver	Activity Capacity	Current Activity Demand	Expected Activity Demand
Material usage	Number of parts	100,000	100,000	100,000
Installing parts	Direct labor hours	38,000	38,000	30,400
Purchasing parts	Number of orders	35,600	30,438	18,690

Additionally, the following activity cost data are provided:

Material usage: $13 per specialized part used; $26 per commodity part; no fixed activity cost.

Installing parts: $30 per direct labor hour; no fixed activity cost.

Purchasing parts: Four salaried clerks, each earning a $40,000 annual salary; each clerk is capable of processing 8,900 purchase orders. Variable activity costs: $1.10 per purchase order processed for forms, postage, etc.

Required:

1. Calculate the cost reduction produced by using commodity parts instead of specialized parts. Enter your answers as positive amounts. If required, round your answers to the nearest cent.

Material usage cost reduction	$
Labor usage cost reduction
Purchasing cost reduction
Total savings	$

2. Suppose that 89,000 units are being produced and sold for $8,100 per unit and that the price per unit will be reduced by the per-unit savings. What is the new price for the configured product? If required, round your intermediate calculations and final answer to the nearest cent.
$

3. What if the expected activity demand for purchase orders was 15,130? How would this affect the answers to Requirements 1 and 2? If required, round your intermediate calculations and final answers to the nearest cent.

Total savings	- Select your answer -IncreaseDecreaseItem 6	by	$	to	$
New price	- Select your answer -IncreaseDecreaseItem 9	by	$	to	$

Answer 1

Answers :-

Ans(1) :-

Particulars	Amount
Material usage cost reduction	0
Labor usage reduction
($38,000 - $30,400) * $30	$228,000
Purchasing cost reduction-
[($40,000+$1.10(30,438 - 18,690)]	$52,922.8
Total savings	$2,28,922.8

Ans(2):-

New price for the product

The new price will be after deducting per unit cost savings calculated above.

$8,100 - ($228,922.8 / 89,000) =$8,097.43

Ans(3):- Expected activity for porchase orders is 15,130.

when purchase orders processed are 15,130 instead of 18,690,there is no change in the number of purchase agents processing the orders (2 agents ) since one agent processes 8,900 orders.

Variable cost reduction will be :

( 18,690 - 15,130)* $1.10

= $3,916.

Per unit reduction for 89,000 units will be:

= $3,916 / 89,000

= $0.04

New price will reduce by $0.04

=$8,097 - $0.04

=$8,096.96