Thomas Inc., is currently producing a motorcycle 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.

Required:
1. Calculate the cost reduction produced by using commodity parts instead of specialized parts.
2. Suppose that 64,000 units are being produced and sold for $9,000 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?
3. What if the expected activity demand for purchase orders was 11,500? How would this affect the answers to Requirements | and 2?LO1

Transcribed Image Text:

Current Expected Activity Activity Activity Activities Material usage Activity Driver Capacity Demand Demand Number of parts 320,000 320,000 320,000 Installing parts Direct labor hours 150,000 150,000 120,000 Purchasing parts Number of orders 30,000 28,500 17,500 Additionally, the following activity cost data are provided: Material usage: $40 per specialized part used; $20 per commodity part; no fixed activity cost. Installing parts: $15 per direct labor hour; no fixed activity cost. Purchasing parts: Five salaried clerks, each earning a $40,000 annual salary; each clerk is capable of processing 6,000 purchase orders. Variable activity costs: $0.75 per purchase order processed for forms, postage, etc.