Pursuant to the request, Jacob produced the following cost and driver information: Activity Expected Cost Driver Activity
Question:
Pursuant to the request, Jacob produced the following cost and driver information:
Activity | Expected Cost | Driver | Activity Capacity | ||||||
Other activities | $2,000,000 | Direct labor dollars | $1,250,000 | ||||||
Moving materials | 900,000 | Number of moves | 18,000 | ||||||
Inspecting | 720,000 | Inspection hours | 24,000 | ||||||
Reworking | 380,000 | Rework hours | 3,800 | ||||||
Total overhead cost | $4,000,000 | ||||||||
Expected activity demands:
Regular Model | Deluxe Model | |||||
Units completed | 100,000 | 40,000 | ||||
Direct labor dollars | $875,000 | $375,000 | ||||
Number of moves | 7,200 | 10,800 | ||||
Inspection hours | 6,000 | 18,000 | ||||
Rework hours | 1,900 | 1,900 |
How would you describe the cost behavior of the inspection activity? Assume that the quality control manager implements a program that reduces the number of defective units by 50 percent. Because of the improved quality, the demand for inspection hours will also drop by 50 percent. What is the potential monthly reduction in inspection costs? How did knowledge of inspection’s cost behavior help?
Inspection activity follows a step-cost function, with each step being defined by fill in the blank hours per year. Each step costs . Current total activity capacity is . Current demand for the activity is hours. If the demand drops by 50 percent, then the new demand would be .Unused capacity at this point will be hours. Thus, can be saved per month.