Danna Martin, president of Mays Electronics, was concerned about the end-of-the- year marketing report that she had just received. According to Larry Savage, market- ing 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 situation worse. The current selling price of $18 per unit was producing a $2- per-unit profit—half the customary $4-per-unit profit. Foreign competitors kept reducing their prices. To match the latest reduction would reduce the price from $18 to $14. This would put the price below the cost to produce and sell it. How could these firms sell for such a low price? Determined to find out if there were problems with the company’s operations, Danna decided to hire a consultant to evaluate the way in which the CBs were produced and sold. After two weeks, the consultant had identified the following activities and costs:

 

Batch-level activities:	Â
Setting up equipment	$ 125,000
Materials handling	180,000
Inspecting  products	122,000
Product-sustaining activities:	Â
Engineering support	120,000
Handling customer complaints	100,000
Filling warranties	170,000
Storing goods	80,000
Expediting goods	75,000
Unit-level activities:	Â
Using materials	500,000
Using power	48,000
Manual insertion labora	250,000
Other direct labor Total costs	     150,000 $1,920,000b

aDiodes, resistors, and integrated circuits are inserted manually into the circuit board.

bThis total cost produces a unit cost of $16 for last year’s sales volume.

 

 

 

 

 

 

 

The consultant indicated that some preliminary activity analysis showed that

per-unit costs could be reduced by at least $7. Since the marketing manager had said that the market share (sales volume) for the boards could be increased by 50 percent if the price could be reduced to $12, Danna became quite excited.

 

Required

1.    What is activity-based management? What phases of activity analysis were pro- vided by the consultant? What else remains to be done?

2.    Identify as many non-value-added costs as possible. Compute the cost savings per unit that would be realized if these costs were eliminated. Was the consul- tant correct in his preliminary cost reduction assessment? Discuss actions that the company can take to reduce or eliminate the non-value-added activities.

3.    Assume that further activity analysis revealed the following: switching to auto- mated insertion would save $60,000 of engineering support and $90,000 of direct labor. Now, what is the total potential cost reduction per unit available from activity analysis? With these additional reductions, can Mays maintain cur- rent sales? Increase sales by 50 percent? What form of activity analysis is this: reduction, sharing, elimination, or selection?

4.    Calculate income based on current sales, prices, and costs. Now, calculate the income using a $14 price and a $12 price, assuming that the maximum cost reduction possible is achieved (including Requirement 3’s reduction). What price should be selected?