Dana Martin, president of Mays Electronics, is concerned about the end-of-the-ye
ID: 2415059 • Letter: D
Question
Dana Martin, president of Mays Electronics, is concerned about the end-of-the-year marketing report. According to Mary O’Brien, marketing manager, a price decrease for the coming year is again needed to maintain the company’s market share of integrated circuit boards (CBs). The current selling price of $18 per unit is producing a $2 per-unit profit—half the customary $4 per-unit profit. Foreign competitors keep reducing their prices, and to match their latest reduction, the price must drop from $18 to $14. This price drop would put Mays’s price below the cost to produce and sell a CB. How could other firms sell for such a low price?
Determined to find out if there are problems with the company’s operations, Dana has decided to hire a consultant to evaluate the way in which the CBs are produced and sold. After two weeks, the consultant has identified the following activities and costs associated with producing 120,000 CBs:
Activity Set-ups . . . . . . . . . . . . 125,000
Materials handling .. . . 180,000
Inspection . . . . . . .. . . 122,000
Customer support .. . . 120,000
Customer complaints . 100,000
Warranty expense .. . . 170,000
Storage . . . . . . . . .. . . 80,000
Rework . . . . . . . . .. . . 75,000
Direct materials . . .. . . 500,000
Utilities . . . . . . . . . .. . . 48,000
Manual insertion labor* 250,000
Other direct labor . . . . 150,000
Total costs . . . . . . . . . . . . . . . . . $1,920,000
*Diodes, resistors, and integrated circuits are inserted manually into the circuit board.
The consultant indicates that some preliminary activity analysis shows that per-unit costs can be reduced by at least $7. The marketing manager indicates that the market share for the CBs could be increased by 50 percent if the price could be reduced to $12.
Instructions
a. For each activity, determine whether it is value-added or non-value-added.
Explanation / Answer
Activity Set-ups . . . . . . . . . . . . 125,000 Value added Materials handling .. . . 180,000 Value added Inspection . . . . . . .. . . 122,000 Value added Customer support .. . . 120,000 Non-value added Customer complaints . 100,000 Non-value added Warranty expense .. . . 170,000 Non-value added Storage . . . . . . . . .. . . 80,000 Non-value added Rework . . . . . . . . .. . . 75,000 Value added Direct materials . . .. . . 500,000 Value added Utilities . . . . . . . . . .. . . 48,000 Value added Manual insertion labor* 250,000 Value added Other direct labor . . . . 150,000 Non-value added
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