Assume that a firm has the following activities and associated cost behaviors: Activities Cost Behavior Assembling...

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Assume that a firm has the following activities and associated cost behaviors: Activities Cost Behavior Assembling components direct labor hour Number of setups Receiving hours $10 per $100 per setup $30,000 per step, 1 step 10 setups $40,000 per step, 1 step 2,000 hours Setting up equipment Variable: Step-fixed: Receiving goods Step-fixed: Activities with step-cost behavior are being fully utilized by existing products. Thus, any new product demands will increase resource spending on these activities. Two designs are being considered for a new product: Design I and Design II. The following information is provided about each design (1,000 units of the product will be produced): Activity Driver Design I Direct labor hours 3,000 10 Design II 2,000 20 4,000 2,000 The company has recently developed a cost equation for manufacturing costs using di rect labor hours as the driver. The equation has R2 0.60 and is as follows: Y = $150,000+ $20X Required: 1. Suppose that Design Engineering is told that only direct labor hours drive manu facturing costs (based on the direct labor cost equation). Compute the cost of each design. Which design would be chosen based on this unit-based cost assumption? 2. Now compute the cost of each design using all driver and activity information. Which design will now be chosen? Are there any other implications associated with the use of the more complete activity information set? 3. Consider the following statement: "Strategic cost analysis should exploit internal linkages." What does this mean? Explain, using the results of Requirements 1 and 2. 4. An outside consultant indicated that target costing ought to be used in the de sign stage. Explain what target costing is, and describe how it requires an under standing of both supplier and customer linkages. 5. What other information would be useful to have concerning the two designs? Explain. Assume that a firm has the following activities and associated cost behaviors: Activities Cost Behavior Assembling components direct labor hour Number of setups Receiving hours $10 per $100 per setup $30,000 per step, 1 step 10 setups $40,000 per step, 1 step 2,000 hours Setting up equipment Variable: Step-fixed: Receiving goods Step-fixed: Activities with step-cost behavior are being fully utilized by existing products. Thus, any new product demands will increase resource spending on these activities. Two designs are being considered for a new product: Design I and Design II. The following information is provided about each design (1,000 units of the product will be produced): Activity Driver Design I Direct labor hours 3,000 10 Design II 2,000 20 4,000 2,000 The company has recently developed a cost equation for manufacturing costs using di rect labor hours as the driver. The equation has R2 0.60 and is as follows: Y = $150,000+ $20X Required: 1. Suppose that Design Engineering is told that only direct labor hours drive manu facturing costs (based on the direct labor cost equation). Compute the cost of each design. Which design would be chosen based on this unit-based cost assumption? 2. Now compute the cost of each design using all driver and activity information. Which design will now be chosen? Are there any other implications associated with the use of the more complete activity information set? 3. Consider the following statement: "Strategic cost analysis should exploit internal linkages." What does this mean? Explain, using the results of Requirements 1 and 2. 4. An outside consultant indicated that target costing ought to be used in the de sign stage. Explain what target costing is, and describe how it requires an under standing of both supplier and customer linkages. 5. What other information would be useful to have concerning the two designs? Explain.

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1 Suppose that Design Engineering is told that only direct labor hours drive manufacturing costs based on the direct labor cost equation Comp ute the cost of each design Which design would be chosen b... View the full answer