Target prices, target costs, value engineering, cost incurrence, locked-in cost, activity-based costing. Cutler Electronics makes a radiocassette player, CE100, which has 80 components. Cutler sells 7,000 units each month for $84 each. The costs of manufactur¬

ing CE100 are $54 per unit, or $378,000 per month. Monthly manufacturing costs incurred are as follows:

Direct materials costs $218,400 Direct manufacturing labour costs 33,600 Machining costs (fixed) 37,800 Testing costs 42,000 Rework costs 16,800 Ordering costs 4,032 Engineering costs (fixed) 25,368 Total manufacturing costs $378,000 Cutler’s management identifies the activity cost pools, the cost drivers for each activity, and the cost per unit of cost driver for each overhead cost pool as follows:

Manufacturing Activity Description ofActivity Cost Driver 1. Machining costs Machining components Fixed costs 2. Testing costs Testing components and final product

(each unit ofCE100 is tested individually) Testing-hours 3. Rework costs Correcting and fixing errors and defects Units of CE100 reworked 4. Ordering costs Ordering of components Number of orders 5. Engineering costs Designing and managing of products and process Fixed costs Cost per Unit ofCost Driver No cost driver

$2.40 per testing-hour

$24 per unit

$25.20 per order No cost driver Over a long-run time horizon, Cutler’s management views direct materials costs and direct manufacturing labour costs as variable with respect to the units of CE100 manufac¬
tured. Each overhead cost described in the preceding table varies, as described, with the cho¬
sen cost drivers.
The following additional information describes the existing design:

a. Testing and inspection time per unit is 2.5 hours.

b. Ten percent ofthe CElOOs manufactured are reworked.

c. Cutler places two orders with each component supplier each month. Each component is supplied by a different supplier. It takes one hour to place an order.
To respond to competitive pressures, Cutler must reduce its price to $74.40 per unit and reduce its costs by $9.60 per unit. No additional sales are anticipated at this lower price.
However, Cutler stands to lose significant sales if it does not cut its price. Manufacturing has been asked to reduce its costs by $7.20 per unit. Improvements in manufacturing efficiency are expected to yield net savings of $1.80 per radiocassette player, but that is not enough. The chief engineer has proposed a new modular design that reduces the number of components to 50 and also simplifies testing. The newly designed radiocassette player, called “New CE100,”
will replace CE100.
The expected effects of the new design are as follows:

a. Direct materials costs for New CE100 are expected to be lower by $2.64 per unit.

b. Direct manufacturing labour costs for New CE100 are expected to be lower by $0.60 per unit.

c. Machining time required to manufacture New CE100 is expected to be 20% less. It currently takes one hour to manufacture one unit ofCE100.

d. Time required for testing New CE100 is expected to be lower by 20%.

e. Rework is expected to decline to 4% of New CElOOs manufactured.
Assume that the cost per unit of the cost driver for CE100 continues to apply to New CE100.
Required 1. Calculate Cutler’s manufacturing cost per unit ofNew CE100.
2. Will the new design achieve the per-unit cost reduction targets that have been set for the manufacturing costs of New CE 100?
3. The problem describes two strategies to reduce costs:

(a) improving manufacturing effi¬
ciency and

(b) modifying the design. Which strategy has a bigger impact on costs? Why?
Explain briefly.
COLLABORATIVE LEARNING PROBLEM