Question:Cornerstone Exercise 11.1 (Algorithmic)

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.

Activitey Activity Drive Activity Capacity Current activity Demand Expected Activity Demand

Material usage Number of parts 200,000 200,000 200,000

Installing parts Direct labor hours 44,000 44,000 35,200

Purchasing Parts Number of orders 27,600 23,598 14,490

Additionally, the following activity cost data are provided:

Material usage: $19 per specialized part used; $27 per commodity part; no fixed activity cost.

Installing parts: $30 per direct labor hour; no fixed activity cost.

Purchasing parts: Four salaried clerks, each earning a $45,000 annual salary; each clerk is capable of processing 6,900 purchase orders. Variable activity costs: $1.30 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 69,000 units are being produced and sold for $7,900 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 11,730? 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- Select your answer (increase or decrease)

by ($----------------------------) to ($ ---------------------------)

New price- Select your answer -

Decrease or increase

by ($-----------------------) to ($ ---------------------)