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 total cost reduction of the new design?

Question

Quizplus · Accepted Answer

The total cost reduction of the new design can be calculated by comparing the costs associated with the current 30-part configuration to the expected costs for the 9-part configuration across all activities (materials usage, assembly, and purchasing).1. **Materials Usage Cost Reduction:**   - Current: 300,000 parts * $5/part = $1,500,000   - Expected: 90,000 parts * $5/part = $450,000   - Reduction: $1,500,000 - $450,000 = $1,050,0002. **Assembly Cost Reduction:**   - Current: 20,000 hours * $20/hour = $400,000   - Expected: 6,000 hours * $20/hour = $120,000   - Reduction: $400,000 - $120,000 = $280,0003. **Purchasing Cost Reduction:**   - Current clerks needed: 16,000 orders / 5,000 orders per clerk = 3.2 clerks (round up to 4 clerks)   - Current total cost: 4 clerks * $40,000/clerk + 16,000 orders * $1/order = $160,000 + $16,000 = $176,000   - Expected clerks needed: 8,000 orders / 5,000 orders per clerk = 1.6 clerks (round up to 2 clerks)   - Expected total cost: 2 clerks * $40,000/clerk + 8,000 orders * $1/order = $80,000 + $8,000 = $88,000   - Reduction: $176,000 - $88,000 = $88,000**Total Cost Reduction:** $1,050,000 (Materials) + $280,000 (Assembly) + $88,000 (Purchasing) = $1,418,000

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