Question

Kagle design engineers are in the process of developing a new “green” product, one that will significantly reduce impact on the environment and yet still provide the desired customer functionality. Currently, two designs are being considered. The manager of Kagle has told the engineers that the cost for the new product cannot exceed $550 per unit (target cost). In the past, the Cost Accounting Department has given estimated costs using a unit-based system. At the request of the Engineering Department, Cost Accounting is providing both unit- and activity-based accounting information (made possible by a recent pilot study producing the activity-based data). Unit-based system: Variable conversion activity rate: $120 per direct labor hour Material usage rate: $30 per part ABC system: Labor usage: $15 per direct labor hour Material usage (direct materials): $20 per part Machining: $80 per machine hour Purchasing activity: $150 per purchase order Setup activity: $3,600 per setup hour Warranty activity: $500 per returned unit (usually requires extensive rework) Customer repair cost: $25 per repair hour (average) Activity and Resource Information (annual estimates) Design A Design B Units produced 20,000 20,000 Direct material usage 350,000 parts 325,000 parts Labor usage 60,000 hours 130,000 hours Machine hours 60,000 70,000 Purchase orders 2,000 1,500 Setup hours 800 200 Returned units 1,300 350 Repair time (customer) 2,100 600 Required: 1. Select the lower-cost design using unit-based costing. - Select your answer -Design ADesign BItem 1 Are logistical and post-purchase activities considered in this analysis? - Select your answer -YesNoItem 2 2. Select the lower-cost design using ABC analysis. - Select your answer -Design ADesign BItem 3 3. What if the post-purchase cost was an environmental contaminant and amounted to $15 per unit for Design A and $40 per unit for Design B? Compute the Post-purchase cost for each design. Post-Purchase Cost Design A $ Design B $ Assume that the environmental cost is borne by society. Now which is the better design? - Select your answer -Design ADesign BItem 6

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Answer 1

Activity and Resource Information (annual estimates)
	Design A		Design B
Units produced	20,000		20,000
Direct material usage	350,000	parts	325,000	parts
Labor usage	60,000	hours	130,000	hours
Machine hours	60,000		70,000
Purchase orders	2,000		1,500
Setup hours	800		200
Returned units	1,300		350
Repair time (customer)	2,100		600
1)		A	B
	variable cost	10,500,000.00	9,750,000.00
	labour cost	7,200,000.00	15,600,000.00
	total	17,700,000.00	25,350,000.00
	per product cost	885	1267.5
	Design A is better
	No its not considered
2)	Labor usage: $15 per direct labor hour
	Material usage (direct materials): $20 per part
	Machining: $80 per machine hour
	Purchasing activity: $150 per purchase order
	Setup activity: $3,600 per setup hour
	Warranty activity: $500 per returned unit (usually requires extensive rework)
	Customer repair cost: $25 per repair hour (average)
		A	B
	Labour cost	900,000.00	1,950,000.00
	Machine cost	7,000,000.00	6,500,000.00
	Machining	4,800,000.00	5,600,000.00
	Purchase cost	300,000.00	225,000.00
	Setup cost	2,880,000.00	720,000.00
	Warrant cost	650,000.00	175,000.00
	Customer repair cost	52500	15000
	Total cost	16,582,500.00	15,185,000.00
	Unit produced	20,000	20,000
	Cost/unit	829.125	759.25
	Design B is better
3)	Extra cost	300,000.00	800,000.00
	Total cost	16,282,500.00	14,385,000.00
	Cost/unit	814.125	719.25
	Design B is better