Textbook Problem

Production run size and activity improvement

Littlejohn, Inc. manufactures machined parts for the automotive industry. The activity cost associated with Part XX-10 is as follows:

Activity	Activity-Base Usage	×	Activity Rate	=	Activity Cost
Fabrication	250 dlh		$80per dlh		$20,000
Setup	10 setups		$80 per setup		800
Production control	10 prod, runs		$30 per prod, run		300
Moving	10 moves		$25 per move		250
Total activity cost per unit					$21,350
Estimated units of production					÷ 500
Activity cost per unit					$ 42.70

Each unit requires 30 minutes of fabrication direct labor. Moreover, part XX-10 is manufactured in production run sizes of 50 units. Each production run is set up, scheduled (production control), and moved as a batch of 50 units. Management is considering improvements in the setup, production control, and moving activities in order to cut the production run sizes by half. As a result, the number of setups, production runs, and mows will double from 10 to 20. Such improvements are expected to speed the company’s ability to respond to customer orders.

• Setup is reengineered so that it takes 60% of the original cost per setup.

• Production control software will allow production control effort and cost per production run to decline by 60%.

• Moving distance was reduced by 40%, thus reducing the cost per mow by the same amount.

A. Determine the revised activity cost per unit under the proposed changes.

B. Did these improvements reduce the activity cost per unit?

C. What cost per unit for setup would be required for the solution in (A) to equal the base solution?