=+4 Develop new rework procedures to reduce rework costs per hour.

No changes are proposed in direct manufacturing labour cost per unit and in total machining costs.

The following table summarises the cost-driver quantities and the cost per unit of each cost driver for Hellovalue III compared with Hellovalue II:

20 000 unit 3 000 000 2 14 testing21 250 80 50 orders per 1

2 3

4 5

6 7

8 9

10 11 12 13 A B C D E F G H I J K L M N Cost category Cost driver total Budgeted Budgeted Budgeted Budgeted quantity of cost driver cost per unit of cost driver total quantity of cost driver cost per unit of cost driver

(1) (2) (5)=(3)x(4) )6( )01()8(x)7(=)9(

Direct materials No. of kits 1 kit per unit 200 000 unit 200 000 $385 1 kit per unit 200 000 unit 200 000 Direct manuf.

labor

(DML)

DML hours 2.65 DML hours per unit 200 000 unit 530 000 20 2.65 DML hours per unit 200 000 unit 530 000 Direct machining

(fixed)

Machinehours

$38

$60 83$ 000 003

$

$

000 003 Ordering and receiving No. of orders 50 orders per component 425 components component 400 components Test and inspection Testinghours 15 testinghours per unit 200 000 hours per unit 200 000 unit 2 800 000 6.5% defect rate 6.5% defect rate Reworkhours 2.5 reworkhours per defective unit 13 000a defective units 32 500 40 2.5 reworkhours per defective unit 13 000a defective units 32 500 a

6.5% defect rate x 200 000 units = 13 000 defective units Rework Manufacturing cost information for 200 000 units of Hellovalue II for 2015 Manufacturing cost information for 200 000 units of Hellovalue III for 2015 Details of budgeted cost-driver quantities

(7) (8)

Details of budgeted cost-driver quantities

(3) (4)

$

$

$375

$20

$1.70

$32 s

s s

s s

s Required Will the proposed changes achieve Auscompt’s targeted reduction of $4 million, or $20 per unit, in manufacturing costs for Hellovalue III? Show your calculations.