Question

Exploiting Internal Linkages

Woodruff Company is currently producing a snowmobile that uses five specialized parts. Engineering has proposed replacing these specialized parts with commodity parts, which will cost less and can be purchased in larger order quantities. Current activity capacity and demand (with specialized parts required) and expected activity demand (with only commodity parts required) are provided.

Activities	Activity Driver	Activity Capacity	Current Activity Demand	Expected Activity Demand
Material usage	Number of parts	150,000	150,000	150,000
Installing parts	Direct labor hours	64,000	64,000	51,200
Purchasing parts	Number of orders	12,000	10,260	6,300

Additionally, the following activity cost data are provided:

Material usage: $20 per specialized part used; $23 per commodity part; no fixed activity cost.

Installing parts: $24 per direct labor hour; no fixed activity cost.

Purchasing parts: Four salaried clerks, each earning a $40,000 annual salary; each clerk is capable of processing 3,000 purchase orders. Variable activity costs: $1.30 per purchase order processed for forms, postage, etc.

Required:

1. Calculate the cost reduction produced by using commodity parts instead of specialized parts. Enter your answers as positive amounts. If required, round your answers to the nearest cent.

Material usage cost reduction	$-450,000
Labor usage cost reduction	307,200
Purchasing cost reduction	45,148
Total savings	$-97,652

2. Suppose that 30,000 units are being produced and sold for $6,800 per unit and that the price per unit will be reduced by the per-unit savings. What is the new price for the configured product? If required, round your intermediate calculations and final answer to the nearest cent.
$

3. What if the expected activity demand for purchase orders was 5,100? How would this affect the answers to Requirements 1 and 2? If required, round your intermediate calculations and final answers to the nearest cent.

Total savings	Increase	by	$	to	$
New price	Decrease	by	$	to	$

Can you answer #3?

Answer 1

Requirement 1: Compute total cost savings as follows

Particulars	Amount
Materials [150000(23-20)]	$450000
Assembling Parts ((64000 - 51200) x 24	$ 307200
Purchasing Parts (((10260 - 6300) × $1.30) +$40,000)	$ 45147
Total cost reduction	$802347

Requirement 2: Compute new selling price as follows

Particulars	Amount
Current price	$6800
Deduct: Cost reduction per unit ($802347 ÷ 30000 units)	$ 26.74
New selling price per unit	$6773.25

Requirement 3: Compute cost savings and new selling price as follows

Particulars	Amount
Materials [150000(23-20)]	$450000
Assembling Parts ((64000 - 51200) x 24	$ 307200
Purchasing Parts (((10260 - 5100) × $1.30) +$40,000 + $ 40000)	$ 86708
Total cost reduction	$ 843908

Compute new selling per unit as follows

Particulars	Amount
Current price	$6800
Deduct: Cost reduction per unit ($843908 ÷ 30000 units)	$ 28.13
New selling price per unit	$6772