Question 49-
Matt Holland president of Holland Electronics was anxious about the end-of-the year marketing report that he had just received. As-per to the Emily Jiminez 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 state worse. The existing selling price of $18 per unit was producing a $2-per unit profit-half the customary $4-per unit profit. Foreign competitors retain reducing their prices. To match the latest discount would reduce the price from $18 to $14. This would place the price below the cost to produce and sell it. How could the foreign companies sell for such a low price? Resolute to find out if there were problems with the company's operation Matt decided to hire Bunney Schmidt a well-known consultant who concentrates in methods of continuous improvement. Bunney indicated that she fondled that an activity-based management system needed to be implemented. Afterward three weeks Bunney had identified the following activities and costs-
Batch-level activities
Setting up equipment $125,000
Materials handling 180,000
Inspecting products 122,000
Product-sustaining activities
Engineering support 120,000
Handling customer complaints 100,000
Filling warranties 170,000
Storing goods 80,000
Expediting goods 75,000
Unit-level activities:
Using materials 500,000
Using power 48,000
Manual insertion labor 250,000
Other direct labor 150,000
Total costs $1,920,000
Bunney indicated that some initial activity analysis shows that per-unit costs can be reduced by at least $7. Since Emily had designated that the market share (sales volume) for the boards could be increased by 50 percent if the price could be abridged to $12 Matt developed quite excited.
Required-
1. Identify as numerous non-value-added costs as possible. Calculate the cost savings per unit that would be realized if these costs were eliminated. Was Bunney correct in her initial cost reduction assessment? Deliberate actions that the company can take to reduce or remove the non-value added activities.
2. Calculate the target cost required to continue current market share, while earning a profit of $4 per unit. Now, calculate the target cost required to expand sales by 50 percent. How much cost decrease would be obligatory to achieve each target?
3. Suppose that Bunney suggested that kaizen costing be used to help reduce costs. The first suggested kaizen initiative is labelled by the following- switching to automated supplement would save $60,000 of engineering support and $90000 of direct labor. Currently what is the total potential cost reduction per unit available? With these additional reductions can Holland accomplish the target cost to maintain current sales? To rise it by 50 percent? ‘
4. Compute the income based on current sales, prices and costs. Now compute the income using a $14 price as well as a $12 price assuming that the maximum cost reduction possible is achieved (including requirement 3's kaizen reduction). What price must be selected?