Activity Based Costing ProjectPart $4$: Recommendations$-$ Increase in price for Product $234$ by $25\%$

Part $5$: Another reasonable recommendation to improve profitability.

Explain recommendation here:

Part $6$: Another reasonable recommendation to improve profitability.

Explain recommendation here:

Autotech Manufacturing Product Costs

Autotech Manufacturing is engaged in the production of replacement parts for automobiles. One plant specializes in the production of two parts: Part $127$ and Part $234.$ Part $127$ produces the highest volume of activity, and for many years it was the only part produced by the plant. Five years ago, Part $234$ was added. Part $234$ was more difficult to manufacture and required special tooling and setups. Profits increased for the first three years after the addition of the new product. In the past two years, however, the plant has faced intense competition, and its sales of Part $127$ have dropped. In fact, the plant showed a small loss in the most recent reporting period. Much of the competition was from foreign sources, and the plant manager was convinced that the foreign producers were guilty of selling the part below the cost of producing it$.$ The following conversation between Patty Goodson, plant manager, and Joseph Fielding divisional marketing manager, reflects the concerns of the division about the future of the plant and its products.

Joseph: You know, Patty, the divisional manager is really concerned about the plant$$s trend. He indicated that in this budgetary environment, we can$$t afford to carry plants that don$$t show a profit. We shut one down just last month because it couldn$$t handle the competition.

Patty: Joe, you and I both know that Part $127$ has a reputation for quality and value. It has been a mainstay for years. I don$$t understand what$$s happening.

Joseph: I just received a call from one of our major customers concerning Part $127.$ He said that a sales representative from another firm offered the part at $$20$ per unit$--$ $$11$ less than what we charge. It$$shardtocompetewithapricelikethat$.$Perhapstheplantissimplyobsolete.

Patty: No$.$ I don$$t buy that. From my sources, I know we have good technology. We are efficient. And it$$s costing a little more than $$21$ to produce that part. I don$$t see hoAfter her meeting with Joseph, Patty requested an investigation of the production costs and

comparative efficiency. She received approval to hire Sergeant Consulting Group to make an

independent investigation.

The staff accountant for Sergeant Consulting Group has uncovered the following costs and

activities associated with the two products.

Overhead is allocated using a plant$-$wide rage based on direct labor hours.

Preliminary analysis of costs by Sergeant Consulting Group revealed that similar costs can be

categorized into the following cost pools. Setup costs are costs that occur each time a new

production run is made. They involve retooling and reconfiguring the machines and technology.

Material handling costs include the equipment and personnel required to transport materials from

supplier trucks to the machines. Typically, materials are taken to a storage area before being

transported to machines. Each production run will need new materials and materials may also be

transported during production runs. Machine costs primarily include depreciation and machine

maintenance. Although the machines are depreciated using accelerated depreciation schedules,

typically the machine wear out from use and are replaced before they become obsolete.

Receiving costs include the costs of clerical and technical help associated with the processing of

each order received from a customer. Engineering costs include the technical support staff that

implement design changes in the part, manage processes to maintain quality, and provide

technical information on the product. The engineering staff maintain a record of the amount of

time spent on each product. General plant costs include all the other administrative costs not

included in the other cost pools.

$($This case is taken from Hansen, Mowen and Guan, "Cost Management: Accounting and Control"

sixth edition, South$-$Western Cengage Learning, $2009,$ problem $4-17,$ pp$.122-123.)$