11.6.8

Laser Cast Inc. manufactures color laser printers. Model J20 presently sells for $250 and has a product cost of $200, as follows:

Direct materials	$140
Direct labor	40
Factory overhead	20
Total	$200

It is estimated that the competitive selling price for color laser printers of this type will drop to $240 next year. Laser Cast has established a target cost to maintain its historical markup percentage on product cost. Engineers have provided the following cost-reduction ideas:

1. Purchase a plastic printer cover with snap-on assembly, rather than with screws. This will reduce the amount of direct labor by 9 minutes per unit.
2. Add an inspection step that will add six minutes per unit of direct labor but reduce the materials cost by $5 per unit.
3. Decrease the cycle time of the injection molding machine from four minutes to three minutes per part. Thirty percent of the direct labor and 40% of the factory overhead are related to running injection molding machines.

The direct labor rate is $17 per hour.

a. Determine the target cost for Model J20, assuming that the historical markup on product cost and selling price are maintained. Round your final answer to two decimal places $___

b. Determine the required cost reduction. Enter as a positive number. Round your final answer to two decimal places $___

c. Evaluate the three engineering improvements together to determine if the required cost reduction (drift) can be achieved. Enter all amounts as positive numbers. Do not round interim calculations but round your final answers to two decimal places.

1. Direct labor reduction	$___	per unit
2. Additional inspection	$___	per unit
3. Injection molding productivity improvement	$___	per unit
Total savings	$___	per unit

On August 1, Rantoul Stores Inc. is considering leasing a building and purchasing the necessary equipment to operate a retail store. Alternatively, the company could use the funds to invest in $1,000,000 of 4% U.S. Treasury bonds that mature in 15 years. The bonds could be purchased at face value. The following data have been assembled:

Cost of store equipment		$1,000,000
Life of store equipment		15 years
Estimated residual value of store equipment		$50,000
Yearly costs to operate the store, excluding
	depreciation of store equipment	$200,000
Yearly expected revenuesyears 16		$300,000
Yearly expected revenuesyears 715		$400,000

Required:

1. Prepare a differential analysis as of August 1 presenting the proposed operation of the store for the 15 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter "0".

Differential Analysis
Operate Retail (Alt. 1) or Invest in Bonds (Alt. 2)
August 1
	Operate Retail (Alternative 1)	Invest in Bonds (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$___	$___	$____
Costs:
Costs to operate store	___	___	___
Cost of equipment less residual value	___	___	___
Profit (loss)	$___	$___	$___