Financial modeling with multiple cost drivers. Radio, Inc., manufactures portable radios. Last year the firm sold 25,000 radios at $25 each. Total costs amounted to $525,000, of which $150,000 were considered fixed. An activity-based costing study recently revealed that Radio's fixed costs include the following components:
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Setup (40 setups at $400 per setup)
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$ 16,000
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Engineering (500 hours at $25 per hour)
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12,500
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Inspection (1,000 inspections at $30 per inspection)
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30,000
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General factory overhead
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61,500
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Total
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$120,000
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Fixed selling and administrative costs
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30,000
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Total
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$150,000
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Management is considering both the installation of new, highly automated manufacturing equipment and a move toward just-in-time inventory and production management. If the new equipment is installed, setups will be quicker and less expensive. Under the proposed JIT approach, there would be 300 setups per year at $50 per setup. Because a total quality program would accompany the move toward JIT, only 100 inspections are anticipated at a cost of $45 each.
After the installation of the new system, 800 hours of engineering would be required at $28 per hour. General factory overhead would increase to $166,100; however, the automated equipment would allow Radio, Inc., to cut its unit variable cost by 20 percent. Finally, the overall improvement in product quality would support a selling price of $26 per unit.
a. Upon seeing the analysis given in the problem, Radio's vice-president for manufacturing exclaimed to the controller, ''I thought you told me this $150,000 cost was fixed. These don't look like fixed costs at all. What you're telling me now is that setup costs us $400 every time we start a production run. What gives?'' As Radio's controller, write a short memo to the vice-president that clarifies the situation.
b. Compute Radio's new break-even point in units if the proposed automated equipment is installed.
c. Calculate how many units Radio, Inc., will have to sell to show a profit of $140,000, assuming the new technology is adopted.
d. If Radio, Inc., adopts the new manufacturing technology, will its break-even point be higher or lower? Will the number of sales units required to earn a profit of $140,000 be higher or lower? Are the results in this case consistent with what you would typically expect to find in a modern high-tech manufacturing facility? Explain.