Digital Solutions

, Inc., manufactures two component parts for the television industry: • Voltage Regulator: Annual production and sales of 50,000 units at a selling price of $48.72 per unit. • Mother Board: Annual production and sales of 25,000 units at a selling price of $72 per unit. Solutions includes all R&D and design costs in engineering costs. Assume that Solutions has no marketing, distribution, or customer-service costs. The direct and overhead costs incurred by Solutions on the Voltage Regulator and Mother Board are described as follows: Voltage Regulator Mother Board Total Direct materials costs (variable) $1,020,000 $720,000 $1,740,000 Direct manufacturing labor costs (variable) 360,000 240,000 600,000 Direct machining costs (fixed) 180,000 120,000 300,000 Manufacturing overhead costs: Machining setup costs 112,500 Testing costs 600,000 Engineering costs 480,000 Manufacturing overhead costs $1,192,500 Total costs $3,832,500 Solution’s management identifies the following activity cost pools, cost drivers for each activity, and the costs per unit of cost driver for each overhead cost pool: Activity Description Cost Driver Cost per Unit of Cost Driver Setup Preparing the machine to manufacture a new batch of products Setup hours $30 per setup-hour Testing Testing components and final product (each unit is tested individually) Testing hours $2.40 per testing hour Engineering Designing products and processes and ensuring their smooth functioning Complexity of product and process Costs assigned to products by special study WWW.YORKVILLEU.CA BUSI 3413: INTERMEDIATE MANAGERIAL ACCOUNTING 2 Over a long-run time horizon, Solution’s management views direct materials costs and direct manufacturing labor costs as variable with respect to the units of Voltage Regulator’s and Mother Board’s produced. Direct machining costs for each product do not vary over this time horizon and are fixed long-run costs. Overhead costs vary with respect to their chosen cost drivers. For example, setup costs vary with the number of setup-hours. Additional information is as follows: Voltage Regulator Mother Board Production batch size 500 units 200 units Setup time per batch 15 hours 18 hours Testing and inspection time per unit of product produced 2.5 hours 5 hours Engineering costs incurred on each product $200,000 $280,000 Solutions is facing competitive pressure to reduce the price of the Voltage Regulator and has set a target price of $48, well below its current price of $52.50. The challenge for Solutions is to reduce the cost of the Voltage Regulator. Solution’s engineers have proposed a new product design and process improvements for the “New Voltage Regulator” to replace the Voltage Regulator. The new design would improve product quality, and reduce scrap and waste. The reduction in prices will not enable Solutions to increase its current sales. (However, if Solutions does not reduce prices, it will lose sales.) The expected effects of the new design relative to the Voltage Regulator are as follows: • Direct materials costs for the New Voltage Regulator are expected to decrease by $2.50 per unit. • Direct manufacturing labour costs for the New Voltage Regulator are expected to decrease by $0.70 per unit. • Time required for testing each unit of the New Voltage Regulator is expected to be reduced by 0.5 hours. • Machining time required to make the New Voltage Regulator is expected to decrease by 20 minutes. It currently takes one hour to manufacture one unit of Voltage Regulator. The machines are dedicated to the production of the New Voltage Regulator. • The New Voltage Regulator will take 7 setup-hours for each setup. • Engineering costs are unchanged. Assume that the batch sizes are the same for the New Voltage Regulator as for the Voltage Regulator. If Solutions requires additional resources to implement the new design, it can acquire these additional resources in the quantities needed. Further assume the costs per unit WWW.YORKVILLEU.CA BUSI 3413: INTERMEDIATE MANAGERIAL ACCOUNTING 3 of cost driver for the New Voltage Regulator are the same as those described for Voltage Regulator. Required 1) Develop full product costs per unit for the Voltage Regulator and Mother Board, using an activity-based product costing approach. (25 marks) 2) What is the markup on the full product cost per unit for the Voltage Regulator? (8 marks) 3) What is Solution’s target cost per unit for the New Voltage Regulator if it is to maintain the same markup percentage on the full product cost per unit as it had for the Voltage Regulator? (10 marks) 4) Will the New Voltage Regulator design achieve the cost reduction targets that Solutions has set? (21 marks) 5) What price would Solutions charge for the New Voltage Regulator if it used the same markup percentage on the full product cost per unit for the New Voltage Regulator as it did for the Voltage Regulator? (6 marks) 6) What price should Solutions charge for the New Voltage Regulator, and what next steps should Solutions take regarding the New Voltage Regulator? (10 marks)

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