The consultant apparently had tentatively identified potential savings through

The consultant apparently had tentatively identified

This preview shows page 31 - 33 out of 35 pages.

least not formally. The consultant apparently had tentatively identified potential savings through eliminating nonvalue-added activities. Management must still decide how to reduce, eliminate, share, and select activities to achieve cost reductions. 2. Setup $125,000 Materials handling 180,000 Inspection 122,000 Customer complaints 100,000 Warranties 170,000 Storing 80,000 Expediting 75,000 Total $852,000 Units produced and sold 120,000* Potential unit cost reduction $7.10 * (Total cost divided by unit cost). The consultant’s estimate of cost reduction was on target. Per-unit costs can be reduced by at least $7, and further reductions may be possible if improvements in value-added activities are possible. 3. Unit cost to maintain sales = $14 – $4 = $10 Unit cost to expand sales = $12 – $4 = $8 Current cost = $16 Cost reduction to maintain = $16 – $10 = $6 Cost reduction to expand = $16 – $8 = $8 4. Total potential reduction: $ 852,000 (from Requirement 2) 150,000 (by automating) $ 1,002,000 Units ÷ 120,000 Unit savings $ 8.35 Costs can be reduced by at least $7, enabling the company to maintain current market share. Further, if all the nonvalue-added costs are eliminated, then the cost reduction needed to increase market share is also possible. Activity selection is the form of activity management used here. 5. Current: Sales $ 2,160,000 ($18 × 120,000 units) Costs (1,920,000 ) Income $ 240,000 $14 price (assumes that current market share is maintained):
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Sales $ 1,680,000 ($14 × 120,000 units) Costs (918,000 ) ($7.65* × 120,000 units) Income $ 762,000 $12 price: Sales $ 2,160,000 ($12 × 180,000 units) Costs (1,377,000 ) ($7.65* × 180,000 units) Income $ 783,000 *$16 – $8.35 = $7.65. The $12 price produces the greatest benefit. Esercizio 19 1. Nonvalue-added usage and costs, 2008: Nonvalue Usage Nonvalue Cost AQ* SQ** AQ – SQ (AQ – SQ)SP Materials 600,000 480,000 120,000 $ 600,000 Engineering 48,000 27,840 20,160 604,800 $1,204,800 *1.25 × 6 × 80,000; (4 × 6,000) + (10 × 2,400) (AQ for engineering represents the actual practical capacity acquired). **6 × 80,000; (0.58 × 24,000) + (0.58 × 24,000). Note: SP = Price of activity quantity; SP for materials is $5; SP for engineering is $30 ($1,440,000/48,000). 2. Expected values for the coming year (2009): Materials: SQ = 480,000 + 0.6(120,000) = 552,000 pounds Engineering: SQ = 27,840 + 0.6(20,160) = 39,936 engineering hours AQ* SQ AQ – SQ SP(AQ – SQ) Materials 584,800 552,000 32,800 $164,000 U Engineering 35,400 39,936 (4,536) 136,080 F *For engineering, the expected value is a measure of how much resource usage is needed (this year), and so progress is measured by comparing with actual usage, not activity availability. The company failed to meet the materials standard but beat the engineering standard. The engineering outcome is of particular interest. The actual usage of the engineering resource is 35,400 hours, and activity availability is 48,000. Thus, the company has created 12,600 hours of unused engineering capacity. Each engineer brings a capacity of 2,000 hours. Since engineers come in whole units, the company now has six too many! Thus, to realize the savings for the engineering activity, the company must decide how to best use these available resources. One possibility is to simply lay off six engineers, thereby increasing total profits by the salaries saved ($360,000). Other possibilities include reassignment to activities that have insufficient resources (assuming they could use engineers, e.g., perhaps new product development could use six engineers). The critical point is that resource usage reductions must be converted into reductions in resource spending, or the efforts have been in vain.
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