Bell Electronics makes an MP3 player, CE100, which has 80 components. Bell sells 7,000 units each month for $ 70 each. The costs of manufacturing CE100 are $ 45 per unit, or $ 315,000 per month. Monthly manufacturing costs are:
Direct material costs.......... $ 182,000
Direct manufacturing labor costs....... 28,000
Machining costs (fixed) ............ 31,500
Testing costs ................. 35,000
Rework costs ................ 14,000
Ordering costs ................ 3,360
Engineering costs (fixed) ........... 21,140
Total manufacturing costs ........... $ 315,000

Bell’s management identifies the activity cost pools, the cost driver for each activity, and the cost per unit of the cost driver for each overhead cost pool as:

Bell’s management views direct material costs and direct manufacturing labor costs as variable for the units of CE100 manufactured. Over a long- run horizon, each of the overhead costs described in the preceding table varies, as described, with the chosen cost drivers.
The following additional information describes the existing design:
a. Testing time per unit is 2.5 hours.
b. Ten percent of the CE100s manufactured are reworked.
c. Bell places two orders with each component supplier each month. A different supplier supplies each component.
d. It currently takes 1 hour to manufacture each unit of CE100.
In response to competitive pressures, Bell must reduce its price to $ 62 per unit and its costs by $ 8 per unit. No additional sales are anticipated at this lower price. However, Bell stands to lose significant sales if it does not reduce its price. Managers ask manufacturing to reduce its costs by $ 6 per unit. Improvements in manufacturing efficiency are expected to yield a net savings of $ 1.50 per MP3 player, but that is not enough. The chief engineer has proposed a new modular design that reduces the number of components to 50 and also simplifies testing. The newly designed MP3 player, called “New CE100” will replace CE100. The expected effects of the new design are:
a. Direct material cost for the New CE100 is expected to be lower by $ 2.20 per unit.
b. Direct manufacturing labor cost for the New CE100 is expected to be lower by $ 0.50 per unit.
c. Machining time required to manufacture the New CE100 is expected to be 20% less, but machine- hour capacity will not be reduced.
d. Time required for testing the New CE100 is expected to be lower by 20%.
e. Rework is expected to decline to 4% of New CE100s manufactured.
f. Engineering- hours capacity will remain the same. Assume that the cost per unit of each cost driver for CE100 continues to apply to New CE100.

1. Calculate Bell’s manufacturing cost per unit of New CE100.
2. Will the new design achieve the per- unit cost- reduction targets that have been set for the manufacturing costs of New CE100? Show your calculations.
3. The problem describes two strategies to reduce costs:
(a) Improving manufacturing efficiency and
(b) Modifying product design. Which strategy has more impact on Bell’s costs? Why? Explain briefly.
4. What challenges might managers at Bell Electronics encounter in achieving the target cost and how might they overcome these challenges?
In response to competitive pressures and to continue to attract 55,000 patrons per week, Lagoon has decided to lower ticket prices to $ 33 per patron. To maintain the same level of profits as before, Lagoon is looking to make the following improvements to reduce operating costs:
a. Spend $ 1,000 per week on advertising to promote awareness of the available online ticket purchase. Lagoon’s managers expect that this will increase online purchases to 40% of total ticket sales. At this volume the cost per online ticket sold will decrease to $ 0.75.
b. Reduce the operating hours for eight of the attractions that are not very popular from 10 hours per day to 7 hours per day.
c. Increase the number of refuse containers in the park at an additional cost of $ 250 per week. Litter patrol employees will be able to cover 1.25 acres per hour. The cost per unit of cost driver for all other activities will remain the same.
1. Does Lagoon currently achieve its target profit of 35% of sales?
2. Will the new changes and improvements allow Lagoon to achieve the same target profit in dollars? Show your calculations.
3. What challenges might managers at Lagoon encounter in achieving the target cost and how might they overcome thesechallenges?

  • CreatedJanuary 15, 2015
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