Dianna Martin, managing director of Mays Electronics, was concerned about the end-of-theyear marketing report that she had just received. According to Larry Savage, marketing

manager, a price decrease for the coming year was again needed to maintain the company's

annual sales volume of integrated circuit boards. This would make a bad situation worse.

The current selling price of $25 per unit was producing a $4-per-unit profit, whereas the

company had usually earned $5.50 per unit profit. Foreign competitors kept reducing their

prices. To match the latest reduction they would need to reduce the price from $25 to $19. This

would put the price below the cost to produce and sell it.

How could these firms sell for such a low price? Determined to find out if there were problems

with the company's operations, Dianna decided to hire a consultant to evaluate the way in which

the circuit boards were produced and sold. After two weeks, the consultant had identified the

following activities and costs:

Unit-level activities: $

Using materials 675,000

Using power 64,000

Manual insertion labour a

335,000

Other direct labour 200,000

Batch-level activities:

Setting up equipment 168,000

Moving raw materials 240,000

Inspecting products 160,000

Product-sustaining activities:

Engineering support 160,000

Repairs under warranty 135,000

Replacing faulty goods 225,000

Finished goods storage 105,000

Rush orders 95,000

Total costs b

$2,562,000

a Diodes, resistors, and integrated circuits are

inserted manually into the circuit board

b This total cost produces a unit cost of $21 for last

year's sales volume

The consultant indicated that some preliminary activity analysis showed that per-unit costs

could be reduced by at least $9. Since the marketing manager had indicated that the market

share (sales volume) for the boards could be increased by 50% if the price could be reduced to

$16, Dianna became quite excited.

ACCT332-21S2 Term Test 5

Required:

You may find it quicker and easier to do the calculation questions in a spreadsheet.

Remember to copy and paste from the spreadsheet into the answer box on Learn.

1. What is activity-based management? What phases of activity analysis were provided by

the consultant? What else remains to be done?

(4 marks)

2. Identify as many non-value-added costs as possible. Compute the cost savings per unit

that would be realised if these costs were eliminated. Was the consultant correct in his

preliminary cost reduction assessment?

(6 marks)

3. Discuss actions that the company could take to reduce or eliminate the non-value-added

activities you identified in 2.

(4 marks)

4. Compute the target cost required to maintain current market share, while earning a profit

of $5.50 per unit. If the non-value-added costs identified in 2 were eliminated, could the

company achieve this target?

(1 marks)

5. Now compute the target cost required to expand sales by 50%. How much cost reduction

would be required to achieve this target?

(1 mark)

6. Assume that further activity analysis revealed the following: switching to automated

insertion would save $75,000 of engineering support and $100,000 of direct labour. Now

what is the total potential cost reduction per unit available from activity analysis? With

these additional reductions, can Mays achieve the target cost to increase sales by 50%?

(2 marks)

7. Calculate income based on current sales, prices, and costs.

(1 marks)

8. Now calculate the income using a $19 price and a $16 price, assuming that the maximum

cost reduction possible is achieved (including the reduction in 6). What price should be

selected?