Suppose the historical costs for the manufacture of a calculator were as follows: direct materials, $5 per unit; direct labour, $3 per unit. Management is trying to decide whether to replace some materials with different materials. The replacement should cut material costs by 5 percent per unit. However, direct labour time will increase by 5 percent per unit. Moreover, direct labour rates will be affected by a recent 10 percent wage increase. 

Prepare an exhibit like Exhibit 8-1, showing where and how the data about direct material and direct labour fit in the decision process. 

Exhibit 8-1

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(a) (b) 1. Historical direct material costs were $1.00 per unit. Direct labour costs were $.70 per unit and will not be affected by Other information Historical information the switch in materials. 2. Use the information as a basis for predicting the future costs of direct material and direct labour. Direct material Prediction method 2. unit costs are expected to be $0.80 and $1.00 for aluminum and copper, respectively. Predictions as inputs to decision modelt 3. COST COMPARISON PER UNIT Decision 3. model Aluminum Copper Difference $0.80 $1.00 Direct material $0.20 Decisions by managers with aid of decision model The expected future costs are the outputs of the predic- tion method and are inputs of the decision model together with other quantitative and qualitative information. 4. The chosen action is implemented and the evaluation of performance becomes a principal source of feedback. This can update historical information and improve the predic- tion method, the decision model, and the implementation Implementation and 4. evaluation of the decision. Feedback