Fred’s Auto Components manufactures seats for an automobile company. The automobile company wants a new seat designed to accommodate drivers and passengers who weigh 200 pounds or more and at a price that is 10% less than the current price. If Fred’s cannot meet the requested cut in price, the manufacturer will ask other suppliers to bid for the contract. Fred’s manufacturing team has redesigned the seats and the manufacturing process to reduce costs by 10%. Now a team is assembled to reconfigure some of the administrative support tasks. If these costs can also be reduced by 10%, Fred’s will be able to meet the new price requirement. The company’s accountant has developed monthly costs for each activity in the support process, as shown in the following table.

REQUIRED

A. Calculate the total current cost of support activities per month.

B. As the manufacturing team redesigned the seats, the support team requested a reduction in the number of parts by 10%. The manufacturing team was able to eliminate 1 part per seat. In addition, the support team negotiated a new rate with the shipping company to reduce the price per pound by $0.03. Calculate the new total cost per month to determine whether the 10% reduction goal has been met.

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Cost Driver quantity per month Cost per unit of driver Activity driver Ordering parts Receiving and inspecting parts Materials handling Packaging fenders for shipping Shipping costs Return of defective seats $40 Number of purchase orders Number of parts Number of parts Number of seats shipped Pounds shipped Number of seats returned 20 6,000 6,000 1,200 36,000 20 $0.10 $0.20 $0.30 $0.25 $500