Activity-Based Management, Non-Value-Added Costs, Target Costs, Kaizen Costing Joseph Hansen, president of Electronica, Inc., was concerned about the end-of-the-year marketing report that he had just received. According to Kylee Hepworth, marketing manager, a price decrease for the coming year was again needed to maintain the company's annual sales volume of integrated circuit boards (CBs). This would make a bad situation worse. The current selling price of $27 per unit was producing a $3-per-unit profithalf the customary $6-per-unit profit. Foreign competitors keep reducing their prices. To match the latest reduction would reduce the price from $27 to $21. This would put the price below the cost to produce and sell it. How could the foreign firms sell for such a low price? Determined to find out if there were problems with the company's operations, Joseph decided to hire Carsen Hepworth, a well-known consultant and brother of Kylee, who specializes in methods of continuous improvement. Carsen indicated that he felt that an activity-based management system needed to be implemented. After three weeks, Carsen had identified the following activities and costs: Batch-level activities: Setting up equipment 187,500 Materials handling 270,000 Inspecting products 183,000 Product-sustaining activities: Engineering support 180,000 Handling customer complaints 150,000 Filling warranties 255,000 Storing goods 120,000 Expediting goods 112,500 Unit-level activities: Using materials 750,000 Using power 72,000 Manual insertion labora 375,000 Other direct labor 225,000 Total costs $2,880,000b aDiodes, resistors, and integrated circuits are inserted manually into the circuit board. bThis total cost produces a unit cost of $24 for last years sales volume. Carsen indicated that some preliminary activity analysis shows that per-unit costs can be reduced by at least $10.50. Since Kylee had indicated that the market share (sales volume) for the boards could be increased by 50 percent if the price could be reduced to $18, Joseph became quite excited. Required: 1. Compute the cost savings per unit that would be realized if these costs were eliminated. If required, round your answer to the nearest cent. $ per unit 2. Compute the target cost required to maintain current market share, while earning a profit of $6 per unit. $ per unit Now, compute the target cost required to expand sales by 50 percent. $ per unit How much cost reduction would be required to achieve each target? Cost reduction to maintain $ per unit Cost reduction to expand $ per unit 4. Assume that Carsen suggested that kaizen costing be used to help reduce costs. The first suggested kaizen initiative is described by the following: switching to automated insertion would save $90,000 of engineering support and $135,000 of direct labor. Now, what is the total potential cost reduction per unit available? If required, round your answer to the nearest cent. $ per unit 5. Calculate income based on current sales, prices, and costs. Sales $ per unit Costs per unit Income $ per unit Now, calculate the income using a $21 price and an $18 price, assuming that the maximum cost reduction possible is achieved (including Requirement 4's kaizen reduction). Income $21 price $ per unit $18 price $ per unit What price should be selected? $18 price