Cornerstones of Cost Management 2nd Edition by Don Hansen ,Maryanne Mowen

Exercise 25

Exploiting Internal Linkages
Woodruff Company is currently producing a snowmobile that uses five specialized parts. Engineering has proposed replacing these specialized parts with commodity parts, which will cost less and can be purchased in larger order quantities. Current activity capacity and demand (with specialized parts required) and expected activity demand (with only commodity parts required) are provided.

Additionally, the following activity cost data are provided:
Material usage : $20 per specialized part used; $16 per commodity part; no fixed activity cost. Installing parts : $14 per direct labor hour; no fixed activity cost. Purchasing parts: Four salaried clerks, each earning a $45,000 annual salary; each clerk is capable of processing 5,000 purchase orders. Variable activity costs: $0.80 per purchase order processed for forms, postage, etc.
Required:
1. Calculate the cost reduction produced by using commodity parts instead of specialized parts.
2. Suppose that 50,000 units are being produced and sold for $8,800 per unit and that the price per unit will be reduced by the per-unit savings. What is the new price for the configured product?
3. What if the expected activity demand for purchase orders was 8,500? How would this affect the answers to Requirements 1 and 2?