Refer to the information in exercise 16.23. The following cost reduction suggestions were made by the kaizen costing team.

• Direct materials — suppliers agreed to cost reductions of $4.50 for direct materials.

• Direct labour — an engineer suggested that the scooters could be manufactured more quickly if production batches were cut in half. The engineer believes that a labour savings of $1.50 per scooter could be attained.

• Machining costs — the team has been unable to identify ways to reduce machining costs in the manufacturing process, but suggests that some of the machining tasks could be outsourced to suppliers so that some parts are pre-assembled, reducing the need for machine hours. This outsourcing would increase the cost of direct materials by $0.50 per unit but cut machining costs by $1.30 per unit. The supplier has been very reliable, but does not currently have the machining expertise and would have to purchase equipment and hire several workers to fill these orders.

• Marketing — marketing has agreed to combine advertising campaigns for both products and believes they will save $2.50 per unit without losing sales.

• Administration and engineering — no cost containment appears possible in administration because a new enterprise resource program was recently acquired. However, the head of engineering believes that her costs can be cut by $4 per unit. She believes that some employees are no longer needed because part of the new program was designed especially to provide information for product and manufacturing process design that had been manually collated in the past.

Required

(a) Calculate the new cost per category. Compare the total cost with the kaizen cost. Determine whether further cost-containment efforts need to be made.

(b) In your own words, describe the next step in the kaizen process.

(c) List qualitative factors that might be relevant to Blade Runner’s managers as they decide on any product or process changes. List as many factors as you can.

(d) For each of the planned cost reductions, discuss uncertainties about whether the entity will achieve the planned cost reduction.

Exercise 16.23.

Blade Runner produces regular scooters and motorised scooters. Blade Runner scooters are considered the most reliable in the marketplace. Demand has been volatile, with huge increases in demand during the holiday season. In the past, the entity filled demand by anticipating demand increases and manufacturing inventories ahead of time.

Recently, competition in the motorised scooter line has escalated, and Blade Runner needs to reduce prices and, therefore, cut costs. The motorised scooter’s current cost is $150. To be competitive, the marketing department says the price should be 10 per cent lower than the current price. Management currently achieves a pre-tax return of 10 per cent on sales of the scooters and wants to continue this rate of return.

The following per-unit costs for motorised scooters are based on production of 700 000 per year.

Transcribed Image Text:

Direct materials (variable) $ 45 Direct labour (variable) Machining costs (fixed depreciation and maintenance) 15 10 Inspection costs (variable) 10 Engineering costs (fixed) 20 Marketing costs (fixed) 25 Administrative costs (fixed) 25 Total cost $150