Chapter 12, Problem 2CE

Assume that at the beginning of 20x2, Cicleta trained the 2 assembly workers in a new approach that had the objective of increasing the efficiency of the assembly process. Cicleta also began moving toward a JIT purchasing and manufacturing system. When JIT is fully implemented, the demand for expediting is expected to be virtually eliminated. It is expected to take two to three years for full implementation. Assume that receiving cost is a step-fixed cost with steps of 1,500 orders. The other three activities employ resources that are acquired as used and needed. At the end of 20x2, the following results were reported for the four activities:

Required:

1. 1. Prepare a trend report that shows the non-value-added costs for each activity for 20x1 and 20x2 and the change in costs for the two periods. Discuss the report’s implications.
2. 2. Explain the role of activity reduction for receiving and for expediting. What is the expected value of SQ for each activity after JIT is fully implemented?
3. 3. What if at the end of 20x2, the selling price of a competing product is reduced by $27 per unit? Assume that the firm produces and sells 20,000 units of its product and that its product is associated only with the four activities being considered. By virtue of the waste-reduction savings, can the competitor’s price reduction be matched without reducing the unit profit margin of the product that prevailed at the beginning of the year? If not, how much more waste reduction is needed to achieve this outcome? In this case, what price decision would you recommend?