Figure 11-1
Ambrosia 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 $6 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.
-Refer to Figure 11-1. What is the cost savings from purchasing parts?

Question

Figure 11-1
Ambrosia 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 $6 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.
-Refer to Figure 11-1. What is the cost savings from purchasing parts?

Quizplus · Accepted Answer

The cost savings from purchasing parts can be calculated as:
Cost of purchasing for 30 parts configuration = 30 parts × $6 per part = $180
Cost of purchasing for 9 parts configuration = 9 parts × $6 per part = $54
Cost savings from purchasing parts = $180 - $54 = $126

Therefore, the cost savings from purchasing parts is $126, which is not an option in the given choices. However, it can be seen that the total cost savings from all activities (assembly, materials usage, and purchasing) for the 9 part configuration compared to the 30 part configuration is:

Assembly cost savings = (20 - 15) × 60 = $300
Materials usage cost savings = (6 × 30) - (6 × 9) = $126
Purchasing cost savings = $40,000 / 5,000 orders + $1 per order = $9 per order
                            total orders = 30 × 3 + 9 × 3 = 117 orders
                            purchasing cost savings = 117 orders × $9 per order = $1,053

Total cost savings = $300 + $126 + $1,053 = $1,479
Therefore, the best choice is B, which is not only the correct total cost savings, but also includes the expected cost savings from purchasing parts.

Figure 11-1 Ambrosia Corp. Is a Manufacturer of Equipment Used in Manufacturing