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 | 250,000 | 250,000 | 250,000 |
| Installing parts | Direct labor hours | 20,000 | 20,000 | 16,000 |
| Purchasing parts | Number of orders | 24,000 | 20,520 | 12,600 |
Additionally, the following activity cost data are provided:
Material usage: $10 per specialized part used; $11 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
$47,000 annual salary; each clerk is capable of processing 6,000
purchase orders. Variable activity costs: $1.60 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 60,000 units are being produced
and sold for $8,300 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 10,200? 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 | Increase Item | by __________ | $ | to | $ ___________ |
| New price | Decrease Item | by __________ | $ | to | $ ____________ |
