Refer to Exercises E19-20 and E19-21. Controller Michael Bender is surprised by the increase in cost of the deluxe model under ABC. Market research shows that for the deluxe rim to provide a reasonable profit, Eason will have to meet a target manufacturing cost of $625.00 per rim. A value engineering study by Eason’s employees suggests that modifications to the finishing process could cut finishing cost from $90.00 to $60.00 per hour and reduce the finishing direct labor hours per deluxe rim from 5.50 hours to 5.0 hours. Direct materials would remain unchanged at $48.00 per rim, as would direct labor at $52.00 per rim. The materials handling, machine setup, and insertion of parts activity costs also would remain the same. 

Would implementing the value engineering recommendation enable Eason to achieve its target cost for the deluxe rim?

Data from Exercises E19-20

Eason Company manufactures wheel rims. The controller expects the following ABC allocation rates for 2018: 

Eason produces two wheel rim models: standard and deluxe. Expected data for 2018 are as follows: 

The company expects to produce 500 units of each model during the year.

Activity Materials handling Machine setup Insertion of parts Finishing Allocation Base Number of parts Number of setups Number of parts Number of finishing hours Predetermined Overhead Allocation Rate $ 4.00 per part 400.00 per setup 26.00 per part 90.00 per hour