Figure 11-1 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.Then current activity capacity and demand for the 30 unit configuration and expected activity demand for the 9 part configuration are provided below:
Materials usage has a rate of $5 per part and no fixed costs.Assembly has a rate of $20 per labor hour with no fixed component.Purchasing requires clerks that can process 5,000 purchase orders.Each clerk earns $40,000 per year.There is also a $1 per order processing cost.
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Refer to Figure 11-1.What is the savings in materials usage cost with the new design changes?

Question

Figure 11-1 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.Then current activity capacity and demand for the 30 unit configuration and expected activity demand for the 9 part configuration are provided below:
 Materials usage has a rate of $5 per part and no fixed costs.Assembly has a rate of $20 per labor hour with no fixed component.Purchasing requires clerks that can process 5,000 purchase orders.Each clerk earns $40,000 per year.There is also a $1 per order processing cost.
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Refer to Figure 11-1.What is the savings in materials usage cost with the new design changes?

Quizplus · Accepted Answer

The original product has 30 parts and the new design only has 9 parts, so the savings in materials usage cost would be:
(30-9) x $5 x 30,000 units = $1,050,000.