Chapter 4, Problem 1MAD

Life Force Fitness, Inc., assembles and sells treadmills. Activity-based product information for each treadmill is as follows:

All of the activity costs are related to labor. Management must remove $2.00 of activity cost from the product in order to remain competitive.

Rework involves disassembling and repairing a unit that fails testing. Not all units require rework, but the average is 0.40 hour per unit. 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 treadmill during final assembly. Thus, motor issues can be diagnosed and solved without having to disassemble the complete treadmill. This change will reduce the average rework per unit by one-quarter.

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

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