Neuro Instruments uses a manufacturing costing system with one direct-cost category (direct materials) and three indirect-cost categories:

a. Setup, production-order, and materials-handling costs that vary with the number of batches

b. Manufacturing-operations costs that vary with machine-hours

c. Costs of engineering changes that vary with the number of engineering changes made

In response to competitive pressures at the end of 2016, Neuro Instruments used value-engineering techniques to reduce manufacturing costs. Actual information for 2016 and 2017 is as follows:

20162017

Setup, production-order, and materials-handling costs per batch....$ 8,900........$ 8,000

Total manufacturing-operations cost per machine-hour..................$ 64............$ 48

Cost per engineering change.............................................$16,000.........$8,000

The management of Neuro Instruments wants to evaluate whether value engineering has succeeded in reducing the target manufacturing cost per unit of one of its products, HJ6, by 5%.

Actual results for 2016 and 2017 for HJ6 are:

Actual Results for 2016 Actual Results for 2017

Units of HJ6 produced........................................2,700..............................4,600

Direct material cost per unit of HJ6.......................$ 1,400............................$ 1,300

Total number of batches required to produce HJ6............60..................................70

Total machine-hours required to produce HJ6............20,000.............................30,000

Number of engineering changes made..........................24....................................7

Required:

1. Calculate the manufacturing cost per unit of HJ6 in 2016.

2. Calculate the manufacturing cost per unit of HJ6 in 2017.

3. Did Neuro Instruments achieve the target manufacturing cost per unit for HJ6 in 2017? Explain.

4. Explain how Neuro Instruments reduced the manufacturing cost per unit of HJ6 in 2017.

5. What challenges might managers at Neuro Instruments encounter in achieving the target cost? How might they overcome these challenges?