Activity-Based Management, Non-Value-Added Costs, Target Costs, Kaizen Costing Joseph Hansen, president of Electronica, Inc., was concerned about the end-of-the-year marketing report that he had just received. According to Asha Kumar, marketing manager, a price decrease for the coming year was again needed to maintain the company's annual sales volume of integrated circuit boards (CBs). This would make a bad situation worse. The current selling price of $27 per unit was producing a $3-per-unit profit—half the customary $6-per-unit profit. Foreign competitors keep reducing their prices. To match the latest reduction would reduce the price from $27 to $21. This would put the price below the cost to produce and sell it. How could the foreign firms sell for such a low price? Determined to find out if there were problems with the company's operations, Joseph decided to hire Ahmed Kumar, a well-known consultant and brother of Asha, who specializes in methods of continuous improvement. Ahmed indicated that he felt that an activity-based management system needed to be implemented. After three weeks, Ahmed had identified the following activities and costs: Batch-level activities: Setting up equipment $ 187,500 Materials handling 270,000 Inspecting products 183,000 Product-sustaining activities: Engineering support 180,000 Handling customer complaints 150,000 Filling warranties 255,000 Storing goods 120,000 Expediting goods 112,500 Unit-level activities: Using materials 750,000 Using power 72,000 Manual insertion labora 375,000 Other direct labor 225,000 Total costs $2,880,000b aDiodes, resistors, and integrated circuits are inserted manually into the circuit board. bThis total cost produces a unit cost of $24 for last year's sales volume. Ahmed indicated that some preliminary activity analysis shows that per-unit costs can be reduced by at least $10.50. Since Asha had indicated that the market share (sales volume) for the boards could be increased by 50 percent if the price could be reduced to $18, Joseph became quite excited. Required: 1. What is activity-based management? What connection does it have to continuous improvement? 2. Identify as many non-value-added costs as possible. Compute the cost savings per unit that would be realized if these costs were eliminated. If required, round your answer to the nearest cent. $fill in the blank 3 per unit Was Ahmed correct in his preliminary cost reduction assessment? 3. Compute the target cost required to maintain current market share, while earning a profit of $6 per unit. $fill in the blank 5 per unit Now, compute the target cost required to expand sales by 50 percent. $fill in the blank 6 per unit How much cost reduction would be required to achieve each target? Cost reduction to maintain $fill in the blank 7 per unit Cost reduction to expand $fill in the blank 8 per unit
Activity-Based Management, Non-Value-Added Costs, Target Costs, Kaizen Costing
Joseph Hansen, president of Electronica, Inc., was concerned about the end-of-the-year marketing report that he had just received. According to Asha Kumar, marketing manager, a price decrease for the coming year was again needed to maintain the company's annual sales volume of integrated circuit boards (CBs). This would make a bad situation worse. The current selling price of $27 per unit was producing a $3-per-unit profit—half the customary $6-per-unit profit. Foreign competitors keep reducing their prices. To match the latest reduction would reduce the price from $27 to $21. This would put the price below the cost to produce and sell it. How could the foreign firms sell for such a low price? Determined to find out if there were problems with the company's operations, Joseph decided to hire Ahmed Kumar, a well-known consultant and brother of Asha, who specializes in methods of continuous improvement. Ahmed indicated that he felt that an activity-based management system needed to be implemented. After three weeks, Ahmed had identified the following activities and costs:
| Batch-level activities: | |
| Setting up equipment | $ 187,500 |
| Materials handling | 270,000 |
| Inspecting products | 183,000 |
| Product-sustaining activities: | |
| Engineering support | 180,000 |
| Handling customer complaints | 150,000 |
| Filling warranties | 255,000 |
| Storing goods | 120,000 |
| Expediting goods | 112,500 |
| Unit-level activities: | |
| Using materials | 750,000 |
| Using power | 72,000 |
| Manual insertion labora | 375,000 |
| Other direct labor | 225,000 |
| Total costs | $2,880,000b |
aDiodes, resistors, and integrated circuits are inserted manually into the circuit board.
bThis total cost produces a unit cost of $24 for last year's sales volume.
Ahmed indicated that some preliminary activity analysis shows that per-unit costs can be reduced by at least $10.50. Since Asha had indicated that the market share (sales volume) for the boards could be increased by 50 percent if the price could be reduced to $18, Joseph became quite excited.
Required:
1. What is activity-based management? What connection does it have to continuous improvement?
2. Identify as many non-value-added costs as possible.
Compute the cost savings per unit that would be realized if these costs were eliminated. If required, round your answer to the nearest cent.
$fill in the blank 3 per unit
Was Ahmed correct in his preliminary cost reduction assessment?
3. Compute the target cost required to maintain current market share, while earning a profit of $6 per unit.
$fill in the blank 5 per unit
Now, compute the target cost required to expand sales by 50 percent.
$fill in the blank 6 per unit
How much cost reduction would be required to achieve each target?
| Cost reduction to maintain | $fill in the blank 7 per unit |
| Cost reduction to expand | $fill in the blank 8 per unit |
4. Assume that Ahmed suggested that kaizen costing be used to help reduce costs. The first suggested kaizen initiative is described by the following: switching to automated insertion would save $90,000 of engineering support and $135,000 of direct labor. Now, what is the total potential cost reduction per unit available? If required, round your answer to the nearest cent.
$fill in the blank 9 per unit
With these additional reductions, can Electronica achieve the target cost to maintain current sales?
To increase it by 50 percent?
What form of activity analysis is this kaizen initiative: reduction, sharing, elimination, or selection?
5. Calculate income based on current sales, prices, and costs.
| Sales | $fill in the blank 13 |
| Costs | fill in the blank 14 |
| Income | $fill in the blank 15 |
Now, calculate the income using a $21 price and an $18 price, assuming that the maximum cost reduction possible is achieved (including Requirement 4's kaizen reduction).
| Income | |
| $21 price | $fill in the blank 16 |
| $18 price | $fill in the blank 17 |
What price should be selected?
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