Tread-Force Fitness, Inc. assembles and sells elliptical machines. All activity costs are related to labor. Management must remove $2.00 of activity cost from the product in order for it to remain competitive. Activity-based product information for each elliptical machine is as follows:

(Hrs per unit)

Activity Activity Based Usage x Activity rate / hr = Activity Cost

Moving 0.20 $15 $3.00

Motor Assembly 1.50 $20 $30.00

Final Assembly 1.00 $18 $18.00

Testing 0.25 $22 $5.50

Rework 0.40 $22 $8.80

Activity Cost per unit $65.30

The Rework activity involves disassembling and repairing a unit that fails testing. Not all units require rework, but the average is 0.40 hours per unit (usage). Presently the testing is done on the completed assembly, but much of the rework has been related to motors, which can be tested independently prior to adding the motor to the elliptical machine during final assembly. Thus, motor issues can be diagnosed and solved without having to disassemble the complete machine. This change will reduce the average Rework activity usage per unit by one-quarter.

Questions:

A. Determine the new activity cost per unit under the rework improvement scenario.

B. If management had the choice of doing either the rework improvement in (A) or cutting the moving activity in half by improving the product flow, which decision should be implemented and Why?