Financial and Managerial Accounting

Business

Quiz 19 :
Costing and the Value Chain

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Quiz 19 :
Costing and the Value Chain

Identifying the four components of the value chain: Research and development (R D) and design activities include the creation of ideas and the development of prototype products, processes, and services. Suppliers and production-related activities include the procurement of raw materials and suppliers and the activities needed to convert them into finished goods and services. Marketing and distribution activities are designed to provide information to potential customers and make the products and services accessible to customers. Customer service activities are those resources consumed by supporting the product or service after it is sold to the customer.

a. Activity Classification Setups Non-value-added Materials handling Non-value-added Inspection Non-value-added Customer support Value-added Customer complaints Non-value-added Warranty expense Non-value-added Storage Non-value-added Rework Non-value-added Direct materials Value-added Utilities Value-added Manual insertion labor Value-added Other direct labor Value-added b. Cost of non-value-added activities: Activity Cost Setups $ 125,000 Materials handling 180,000 Inspection 122,000 Customer complaints 100,000 Warranty expense 170,000 Storage 80,000 Rework 75,000 Total non-value-added costs $852,000 Non-value-added cost per unit: $852,000/120,000 units = $7.10 per unit. If all non-value added costs could be eliminated, the cost per unit would decrease by $7.10. Thus, the consultant's estimate was theoretically correct. c. To maintain current market share, the selling price per CB must drop to $14. Given a target profit of $4, the target cost per CB equals $10 ($14 - $4). The current cost per unit is $16 ($1,920,000/120,000 units) so to reach the target, costs must be reduced by $6 ($16 - $10). To increase market share by 50%, the selling price per CB must drop to $12. Given a target profit of $4, the target cost per CB equals $8 ($12 - $4). The current cost per unit is $16 ($1,920,000/120,000 units) so to reach the target, costs must be reduced by $8 ($16 - $8). d. The net cost reduction of switching to automated insertion is $100,000 ($90,000 + $20,000 + $40,000 -$50,000). The per unit cost reduction would be $.83 ($100,000/120,000 units). To maintain current market share, the cost per unit must be reduced by $6 from part c. Switching to automated insertion does not result in enough cost savings to reach the target cost. e. Total net cost reduction: Net cost reduction Automated insertion $100,000 (from part d ) Factory redesign 90,000 ($100,000 + $10,000 - Leasing machine 65,000 ($80,000 - $15,000) Just-in-time system 40,000 ($45,000 - $5,000) Quality training and bonus 207,000 ($122,000 + 120,000 - Total net cost reduction $502,000 The total net cost reduction per unit equals $4.18 ($502,000/120,000 units). From part c, the cost per unit needed to be reduced by $6, so even with the combined actions, the target cost has still not been reached.

Three criteria for successful business process management are: 1) focus on the core operations of the business; 2) seek ways in which to drive costs out of these core operations; and 3) pay careful attention to the needs of customers in order to create customer satisfaction.

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