Clinton Corp. is a manufacturer of equipment used in manufacturing. It currently produces a product with 30 parts but through redesign has reduced the number of parts to 9. The current activity capacity and demand for the 30-unit configuration and expected activity demand for the 9-part configuration are provided below:
$\begin{array}{|l|l|c|c|c|}
\hline\text { Activities } & \text { Activity } & \text { Activity } & \text { Current } & \text { Expected }\
&\text { Driver } & \text { Capacity } & \text { Activity Demand } & \text { Activity Demand }\\hline \begin{array}{l}
\text { Materials } \
\text { usage }
\end{array} & \begin{array}{l}
\text { number } \
\text { of parts }
\end{array} & 300,000 & 300,000 & 90,000 \
\hline \text { Assembly } & \begin{array}{l}
\text { direct } \
\text { labour } \
\text { hours }
\end{array} & 20,000 & 20,000 & 6,000 \
\hline \begin{array}{l}
\text { Purchasing } \
\text { parts }
\end{array} & \begin{array}{l}
\text { number } \
\text { of orders }
\end{array} & 20,000 & 16,000 & 8,000 \
\hline
\end{array}$ Materials usage has a rate of $5 per part and no fixed costs.Assembly has a rate of $20 per labour hour with no fixed component.Purchasing requires clerks who can process 5,000 purchase orders.Each clerk earns $40,000 per year.There is also a $1 per order processing cost.
-Refer to the figure.What is the cost savings from purchasing parts?

Question

Quizplus · Accepted Answer

The cost savings from purchasing parts can be calculated by comparing the costs before and after the redesign. Before the redesign, the company needed clerks to process 16,000 orders, which requires 4 clerks (16,000 orders / 5,000 orders per clerk = 3.2 clerks, rounded up to 4 because you can't have a fraction of a clerk). The cost for these clerks is 4 clerks * $40,000 per clerk = $160,000. Additionally, there's a $1 per order processing cost, adding $16,000 (16,000 orders * $1 per order) to the cost, totaling $176,000.After the redesign, the company needs to process 8,000 orders, requiring 2 clerks (8,000 orders / 5,000 orders per clerk = 1.6 clerks, rounded up to 2). The cost for these clerks is 2 clerks * $40,000 per clerk = $80,000. The $1 per order processing cost adds $8,000 (8,000 orders * $1 per order) to the cost, totaling $88,000.The cost savings from purchasing parts is the difference between the costs before and after the redesign: $176,000 (before) - $88,000 (after) = $88,000.

Clinton Corp Materials Usage Has a Rate of $5 Per Part and It