Reconsider the Astel Computer example (pages 583–586). Astel’s marketing manager realizes that a further reduction in price is necessary to sell 200,000 units of Provalue II. To maintain a target profitability of $16 million, or $80 per unit, Astel will need to reduce costs of Provalue II by $6 million, or $30 per unit. Astel targets a reduction of $4 million, or $20 per unit, in manufacturing costs, and $2 million, or $10 per unit, in marketing, distribution, and customer service costs. The cross-functional team assigned to this task proposes the following changes to manufacture a different version of Provalue, called Provalue III:
1. Reduce direct materials and ordering costs by purchasing sub-assembled components rather than individual components.

2. Reengineer ordering and receiving to reduce ordering and receiving costs per order.
3. Reduce testing time and the labor and power required per hour of testing.
4. Develop new rework procedures to reduce rework costs per hour. No changes are proposed in direct manufacturing labor cost per unit and in total machining costs. The following table summarizes the cost-driver quantities and the cost per unit of each cost driver for Provalue III compared with Provalue II.

Required:

Will the proposed changes achieve Astel’s targeted reduction of $4 million, or $20 per unit, in manufacturing costs for Provalue III? Show your computations.

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1 2 3 4 5 6 7 8 9 10 Home Insert B A Cost Category (1) Direct materials Direct manuf. labor (DML) Ordering and receiving Test and inspection Cost Driver Direct machining hours (fixed) Rework (2) No. of kits DML hours Machine- No. of orders Testing- hours Rework- hours C Page Layout Formulas Data G ΤΕΤΕ Manufacturing Cost Information for 200,000 Units of Provalue Il for 2020 Details of Budgeted Cost Driver Quantities (4) (3) 1 kit per unit 200,000 units 2.65 DML hours 200,000 units per unit 50 orders per component 15 testing- hours per unit 2.5 rework- hours per defective unit 425 compo nents 6.5% defect rate 13,000 defec tive units Budgeted Total Quantity of Cost Driver 11 12 13 6.5% defect rate x 200,000 units = 13,000 defective units (5)-(3)x(4) 200,000 530,000 300,000 200,000 units 3,000,000 21,250 32,500 Review H Budgeted Cost per Unit of Cost Driver (6) $385 $ 20 $38 $ 80 $2 $ 40 I View M Manufacturing Cost Information for 200,000 Units of Provalue III for 2020 Details of Budgeted Cost Driver Quantities (8) (7) 1 kit per unit 200,000 units 2.65 DML hours per unit 50 orders per component KL 14 testing- hours per unit 2.5 rework- hours per defective unit 200,000 units 400 compo- nents 200,000 units 6.5% defect rate 13,000 defec- tive units Budgeted Total Quantity of Cost Driver (9)=(7)x(8) 200,000 530,000 300,000 N Budgeted Cost per Unit of 32,500 Cost Driver (10) $ 375 $ 20 $38 20,000 $ 60 2,800,000 $1.70 $ 32