Joseph Hansen, president of Electronica, Inc., was concerned about the end-of-the-year marketing report that he had just received. According to Kylee Hepworth, marketing manager, a price decrease for the coming year was again needed to maintain the company’s annual sales volume of integrated circuit boards (CBs). This would make a bad situation worse. The current selling price of $27 per unit was producing a $3-per-unit profit—half the customary $6-per-unit profit. Foreign competitors keep reducing their prices. To match the latest reduction would reduce the price from $27 to $21. This would put the price below the cost to produce and sell it. How could the foreign firms sell for such a low price? Determined to find out if there were problems with the company’s operations, Joseph decided to hire Carsen Hepworth, a well-known consultant and brother of Kylee, who specializes in methods of continuous improvement. Carsen indicated that he felt that an activity-based management system needed to be implemented. After three weeks, Carsen had identified the following activities and costs: a Diodes, resistors, and integrated circuits are inserted manually into the circuit board. b This total cost produces a unit cost of $24 for last year’s sales volume. Carsen indicated that some preliminary activity analysis shows that per-unit costs can be reduced by at least $10.50. Since Kylee had indicated that the market share (sales volume) for the boards could be increased by 50 percent if the price could be reduced to $18, Joseph became quite excited. Required: 1. What is activity-based management? What connection does it have to continuous improvement? 2. Identify as many non-value-added costs as possible. Compute the cost savings per unit that would be realized if these costs were eliminated. Was Carsen correct in his preliminary cost reduction assessment? Discuss actions that the company can take to reduce or eliminate the non-value-added activities. 3. Compute the target cost required to maintain current market share, while earning a profit of $6 per unit. Now, compute the target cost required to expand sales by 50 percent. How much cost reduction would be required to achieve each target? 4. Assume that Carsen suggested that kaizen costing be used to help reduce costs. The first suggested kaizen initiative is described by the following: switching to automated insertion would save $90,000 of engineering support and $135,000 of direct labor. Now, what is the total potential cost reduction per unit available? With these additional reductions, can Electronica achieve the target cost to maintain current sales? To increase it by 50 percent? What form of activity analysis is this kaizen initiative: reduction, sharing, elimination, or selection? 5. Calculate income based on current sales, prices, and costs. Now, calculate the income using a $21 price and an $18 price, assuming that the maximum cost reduction possible is achieved (including Requirement 4’s kaizen reduction). What price should be selected?

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
BuyFind

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

Solutions

Chapter 12, Problem 26P
Textbook Problem

Joseph Hansen, president of Electronica, Inc., was concerned about the end-of-the-year marketing report that he had just received. According to Kylee Hepworth, marketing manager, a price decrease for the coming year was again needed to maintain the company’s annual sales volume of integrated circuit boards (CBs). This would make a bad situation worse. The current selling price of $27 per unit was producing a $3-per-unit profit—half the customary $6-per-unit profit. Foreign competitors keep reducing their prices. To match the latest reduction would reduce the price from $27 to $21. This would put the price below the cost to produce and sell it. How could the foreign firms sell for such a low price? Determined to find out if there were problems with the company’s operations, Joseph decided to hire Carsen Hepworth, a well-known consultant and brother of Kylee, who specializes in methods of continuous improvement. Carsen indicated that he felt that an activity-based management system needed to be implemented. After three weeks, Carsen had identified the following activities and costs:

Chapter 12, Problem 26P, Joseph Hansen, president of Electronica, Inc., was concerned about the end-of-the-year marketing

aDiodes, resistors, and integrated circuits are inserted manually into the circuit board.

bThis total cost produces a unit cost of $24 for last year’s sales volume.

Carsen indicated that some preliminary activity analysis shows that per-unit costs can be reduced by at least $10.50. Since Kylee had indicated that the market share (sales volume) for the boards could be increased by 50 percent if the price could be reduced to $18, Joseph became quite excited.

Required:

  1. 1. What is activity-based management? What connection does it have to continuous improvement?
  2. 2. Identify as many non-value-added costs as possible. Compute the cost savings per unit that would be realized if these costs were eliminated. Was Carsen correct in his preliminary cost reduction assessment? Discuss actions that the company can take to reduce or eliminate the non-value-added activities.
  3. 3. Compute the target cost required to maintain current market share, while earning a profit of $6 per unit. Now, compute the target cost required to expand sales by 50 percent. How much cost reduction would be required to achieve each target?
  4. 4. Assume that Carsen suggested that kaizen costing be used to help reduce costs. The first suggested kaizen initiative is described by the following: switching to automated insertion would save $90,000 of engineering support and $135,000 of direct labor. Now, what is the total potential cost reduction per unit available? With these additional reductions, can Electronica achieve the target cost to maintain current sales? To increase it by 50 percent? What form of activity analysis is this kaizen initiative: reduction, sharing, elimination, or selection?
  5. 5. Calculate income based on current sales, prices, and costs. Now, calculate the income using a $21 price and an $18 price, assuming that the maximum cost reduction possible is achieved (including Requirement 4’s kaizen reduction). What price should be selected?

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Chapter 12 Solutions

Cornerstones of Cost Management (Cornerstones Series)
Ch. 12 - Explain why a detailed task description is needed...Ch. 12 - What are some of the reasons that ABM...Ch. 12 - Explain how lack of integration of an ABM system...Ch. 12 - Describe a financial-based responsibility...Ch. 12 - Describe an activity-based responsibility...Ch. 12 - Cicleta Manufacturing has four activities:...Ch. 12 - Assume that at the beginning of 20x2, Cicleta...Ch. 12 - Gordon Company produces custom-made machine parts....Ch. 12 - Foy Company has a welding activity and wants to...Ch. 12 - Uchdorf Manufacturing just completed a study of...Ch. 12 - Harvey Company produces two models of blenders:...Ch. 12 - For the following two activities, ask a series of...Ch. 12 - Thayne Company has 30 clerks that work in its...Ch. 12 - Suppose that clerical erroreither Thaynes or the...Ch. 12 - Refer to Exercise 12.8. Suppose that clerical...Ch. 12 - Refer to Exercise 12.10. Suppose that Thayne...Ch. 12 - For Situations 1 through 6, provide the following...Ch. 12 - Maquina Company produces custom-made machine...Ch. 12 - Sanford, Inc., has developed value-added standards...Ch. 12 - Refer to Exercise 12.14. Suppose that for 20x2,...Ch. 12 - Jane Erickson, manager of an electronics division,...Ch. 12 - For each of the following situations, two...Ch. 12 - Which of the following are examples of...Ch. 12 - A company is spending 70,000 per year for...Ch. 12 - Which of the following is likely to be used to...Ch. 12 - Activity-based management includes both process...Ch. 12 - The activity of moving materials uses four...Ch. 12 - Joseph Fox, controller of Thorpe Company, has been...Ch. 12 - Baker, Inc., supplies wheels for a large bicycle...Ch. 12 - Novo, Inc., wants to develop an activity flexible...Ch. 12 - Joseph Hansen, president of Electronica, Inc., was...Ch. 12 - Tom Young, vice president of Dunn Company (a...Ch. 12 - Bienestar, Inc., has two plants that manufacture a...Ch. 12 - Kelly Gray, production manager, was upset with the...Ch. 12 - Douglas Davis, controller for Marston, Inc.,...

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