Danna Martin, president of Mays Electronics, was concerned about the end-of-the year mar¬

keting report that she had just received. According to Larry Savage, 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 cur¬

rent selling price of $18 per unit was producing a $2 per-unit profit—half the customary $4 per-unit profit. Foreign competitors kept reducing their prices. To match the latest reduc¬

tion would reduce the price from $18 to $14. This would put the price below the cost to pro¬

duce and sell it. How could these firms sell for'such a low price? Determined to find out if there were problems with the company's operations, Danna decided to hire a consultant to evaluate the way in which the CBs were produced and sold. After two weeks, the consul¬

tant had identified the following activities and costs:

The consultant indicated that some preliminary activity analysis shows that per-unit costs can be reduced by at least $7. Since the marketing manager had indicated that the market share (sales volume) for the boards could be increased by 50% if the price could be reduced to $12, Danna became quite excited.

Required:
1. What is activity-based management? What phases of activity analysis were provided by the consultant? What else remains to be done?
2. Identify as many nonvalue-added costs as possible. Compute the cost savings per unit that would be realized if these costs were eliminated. Was the consultant correct in his preliminary cost reduction assessment? Discuss actions that the company can take to reduce or eliminate the nonvalue-added activities.
3. Compute the target cost required to maintain current market share, while earning a profit of $4 per unit. Now compute the target cost required to expand sales by 50%.
How much cost reduction would be required to achieve each target?
4. Assume that further activity analysis revealed the following: switching to automated insertion would save $60,000 of engineering support and $90,000 of direct labor. Now what is the total potential cost reduction per unit available from activity analysis? With these additional reductions, can Mays achieve the target cost to maintain current sales?
To increase it by 50%? What form of activity analysis is this: reduction, sharing, elimi¬
nation, or selection?
5. Calculate income based on current sales, prices, and costs. Now calculate the income using a $14 price and a $12 price, assuming that the maximum cost reduction possible is achieved (including Requirement 4's reduction). What price should be selected?

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Batch-level activities: Setting up equipment $ 125,000 Material handling 180,000 Inspecting products 122,000 Product-sustaining activities: Engineering support 120,000 Handling customer complaints 100,000 Filling warranties 170,000 Storing goods 80,000 Expediting goods Unit-level activities: Using materials Using power Manual insertion labor' Other direct labor Total costs "Diodes, resistors, and integrated circuits are inserted manually into the circuit board. "This total cost produces a unit cost of $16 for last year's sales volume. 75,000 500,000 48,000 250,000 150,000 $1,920,000