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.

Activities	Activity Driver	Activity Capacity	Current Activity Demand	Expected Activity Demand
Material usage	Number of parts	220,000	220,000	220,000
Installing parts	Direct labor hours	79,000	79,000	63,200
Purchasing parts	Number of orders	14,400	12,312	7,560

Additionally, the following activity cost data are provided:

Material usage: $16 per specialized part used; $20 per commodity part; no fixed activity cost.

Installing parts: $29 per direct labor hour; no fixed activity cost.

Purchasing parts: Four salaried clerks, each earning a $47,000 annual salary; each clerk is capable of processing 3,600 purchase orders. Variable activity costs: $1.60 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 36,000 units are being produced and sold for $8,000 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 6,120? 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	Increase	by	$	to	$
New price	Decrease	by	$	to	$

Feedback

1. See Cornerstone 11.1. Use information given to calculate cost reduction.

2. New price = old price per unit (Total savings new units given)

3. Recalculate using new purchase orders activity.