Exploiting Internal Linkages Woodruff Company is currently producing a snowmobile that uses five specialized parts. Engineering has proposed replacing these specialized parts with commodity parts, which will cost less and can be purchased in larger order quantities. Current activity capacity and demand (with specialized parts required) and expected activity demand (with only commodity parts required) are provided. Activity Current Expected Activity Activity Activities Activity Driver Capacity Demand Demand Material usage Number of parts 140,000 140,000 140,000 Direct labor Installing parts 28,000 28,000 hours 22,400 Purchasing Number of 31,600 27,018 parts 16,590 orders Additionally, the following activity cost data are provided: Material usage: $26 per specialized part used; $30 per commodity part; no fixed activity cost. Installing parts: $27 per direct labor hour; no fixed activity cost. Purchasing parts: Four salaried clerks, each earning a $40,000 annual salary, each clerk is capable of processing 7,900 purchase orders. Variable activity costs: $1.80 per purchase order processed for forms, postage, etc. Required: 1. Calculate the cost reduction produced by using commodity parts instead of specialized parts. Enter your answers as positive amounts. If required, round your answers to the nearest cent. Material usage cost reduction $ Labor usage cost reduction Purchasing cost reduction Total savings 2. Suppose that 79,000 units are being produced and sold for $6,200 per unit and that the price per unit will be reduced by the per-unit savings. What is the new price for the configured product? If required, round your intermediate calculations and final answer to the nearest cent. 3. What if the expected activity demand for purchase orders was 13,430? How would Activity Current Expected Activity Activity Activities Activity Drive Capacity Demand Demand Material usage Number of parts 140,000 140,000 140,000 Direct labor Installing parts hours 28,000 28,000 22,400 Purchasing Number of 31,600 parts orders 27,018 16,590 Additionally, the following activity cost data are provided Material usage: $26 per specialized part used; $30 per commodity part: no fixed activity cost. Installing parts: $27 per direct labor hour; no fixed activity cost. Purchasing parts: Four salaried clerks, each earning a $40,000 annual salary, each clerk is capable of processing 7,900 purchase orders. Variable activity costs: $1.80 per purchase order processed for forms, postage, etc. Required: 1. Calculate the cost reduction produced by using commodity parts instead of specialized parts. Enter your answers as positive amounts. If required, round your answers to the nearest cent. Material usage cost reduction $ Labor usage cost reduction - Purchasing cost reduction Total savings - 2. Suppose that 79,000 units are being produced and sold for $6,200 per unit and that the price per unit will be reduced by the per-unit savings. What is the new price for the configured product? If required, round your intermediate calculations and final answer to the nearest cent. 3. What if the expected activity demand for purchase orders was 13,430? How would this affect the answers to Requirements 1 and 2? If required, round your intermediate calculations and final answers to the nearest cent. Total savings to $ by $ by $ New price to $1
