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July 22, 2015 at 5:59 am #261364Erica
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I have a question which I do not know how to go about with.
Baiocchi Electronics makes a radio-cassette player, BE200, which has 100 components. Baiocchi sells 8,000 units each month for $80 each. The costs of manufacturing BE200 are $50 per unit, or $40,000 per month. Monthly manufacturing costs incurred are :
DM costs $198,000
DL costs $41,000
Prod OH $161,000
Total manufacturing cost $400,000
The management would like to recalculate the cost per unit of BE200 based on activity based costing. They identified the following cost pools, cost driver and cost driver rate.
Machining costs = Machine hour capacity of $5 per machine hour
Testing costs = Testing hours of $2.50 per testing hour
Rework costs = Units of BE200 reworked of $25 per unit reworked
Ordering costs = Number of orders of $26 per order
Engineering costs = Engineering-hour capacity of $40 per engineering hour
The DM and DL costs are variable cost.
The following additional information is available in respect of BE200:
a) Testing & inspecting time per unit is 3 hours.
b) 10% of the BE200 manufactured are reworked.
c) Baiocchi places two orders with each component supplier each month. Each component is supplied by a different supplier.
d) It currently takes 1.5 machine hour and 1 engineering hour to manufacture each unit of BE200.
1) Recalculate the cost per unit of BE200 using activity based costing principles.
Due to intense competition, the company need to reduce price of BE200 %74 and planned to maintain current profit margin. The company is likely to lose significant sales if it does not reduce its price.
The chief engineer has proposed a new modular design that reduces the number of components to 60 and also simplifies testing. The newly designed radio-cassette player, called “New BE200? will replace BE200.
The expected effects of the new design are as follows :
a) DM cost for New BE200 is expected to be lower by $2.80 per unit.
b) DL cost for New BE200 is expected to be lower by $1 per unit.
c) Machining time required for New BE200 is expected to be 20% less.
d) Rework is expected to decline to 4% of New BE200 manufactured.
e) Time required for testing New BE200 is expected to be lower by 20%.
f) Engineering-hours will be 40% less.
The cost driver rate for BE200 continues to apply to New BE200.
2) Calculate cost per unit of New BE200
3) Will the new design achieve the per unit cost reduction target.
I’m lost at the desired profit margin. It’d be kind enough of you to explain step-by-step.July 22, 2015 at 9:11 am #261375John MoffatKeymaster
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Please see my answer to your other question.
We do not provide complete model answers to questions that you have found in other books – sorry.
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