Kagle design engineers are in the process of developing a new green product, one that will significantly reduce impact on the environment and yet still provide the desired customer functionality. Currently, two designs are being considered. The manager of Kagle has told the engineers that the cost for the new product cannot exceed $550 per unit (target cost). In the past, the Cost Accounting Department has given estimated costs using a unit-based system. At the request of the Engineering Department, Cost Accounting is providing both unit- and activity-based accounting information (made possible by a recent pilot study producing the activity-based data).

Unit-based system: Variable conversion activity rate: $100 per direct labor hour

Material usage rate: $20 per part ABC system: Labor usage: $15 per direct labor hour

Material usage (direct materials): $20 per part

Machining: $75 per machine hour

Purchasing activity: $150 per purchase order

Setup activity: $3,000 per setup hour

Warranty activity: $500 per returned unit (usually requires extensive rework)

Customer repair cost: $25 per repair hour (average)

Activity and Resource Information (annual estimates)

Design A Design B Units produced 25,000 25,000

Direct material usage 300,000 parts 275,000 parts

Labor usage 50,000 hours 120,000 hours

Machine hours 50,000 60,000

Purchase orders 2,000 1,500

Setup hours 600 200

Returned units 1,000 250

Repair time (customer) 2,000 500

Required:

1. Select the lower-cost design using unit-based costing. Are logistical and post-purchase activities considered in this analysis?

2. Select the lower-cost design using ABC analysis. Explain why the analysis differs from the unit-based analysis.

3. What if the post-purchase cost was an environmental contaminant and amounted to $10 per unit for Design A and $40 per unit for Design B? Assume that the environmental cost is borne by society. Now which is the better design?