Danna Martin, president of Mays Electronics, was concerned about the end-of-the year marketing

report that she had just received. According to Larry Savage, marketing manager, a price decrease for
the coming year was again needed to maintain the company’s annual sales volume of integrated
circuit boards (CBs). This would make a bad situation worse.

The current selling price of $18 per unit was producing a $2-per-unit profit—half the customary $4-per-unit pr

Foreign competitors kept reducing their prices. To match the latest reduction would reduce the price from $18
to $14. This would put the price below the cost to produce and sell it.

How could these firms sell for such a low price? Determined to find out if there were problems with the
company’s operations, Danna decided to hire a consultant to evaluate the way in which the CBs were produce
and sold. After two weeks, the consultant had identified the following activities and costs:

Batch-level activities:
Setting up equipment $ 125,000.00
Materials handling 180,000.00
Inspecting products 122,000.00
Product-sustaining activities:
Engineering support 120,000.00
Handling customer complaints 100,000.00
Filling warranties 170,000.00
Storing goods 80,000.00
Expediting goods 75,000.00
Unit-level activities:
Using materials 500,000.00
Using power 48,000.00
Manual insertion labor (a.) 250,000.00
Other direct labor 150,000.00
Total costs $ 1,920,000.00 (b.)
Diodes, resistors, and integrated circuits are
inserted manually into the circuit board.
(b.) This total cost produces a unit cost of $16 for last year’s sales volume.
The consultant indicated that some preliminary activity analysis shows that per-unit costs can be
reduced by at least $7.
Since the marketing manager had indicated that the market share (sales volume) for the boards could be
increased by 50 percent if the price could be reduced to $12, Danna became quite excited.
-of-the year marketing
ager, a price decrease for
volume of integrated
—half the customary $4-per-unit profit.
n would reduce the price from $18
ere were problems with the
way in which the CBs were produced
ties and costs:
per-unit costs can be
ume) for the boards could be
e quite excited.
REQUIRED
1. What is activity-based management? What phases of activ
Activity-based management is a system-wide, integrated appro
dimensions which are cost dimension and process dimension.
only value-added activities.The consultant classified the activiti
added nor did the consultant give any recommendations for im
identified possible savings by eliminating activities that are non
eliminate, share, amd select activities to achieve cost savings.
2. Identify as many non-value-added costs as possible. Compu
eliminated. Was the consul- tant correct in his preliminary co
or eliminate the non-value-added activities.
Setup
Materials handling
Inspection
Customer complaints
Warranties
Storing
Expediting
Total non-value added costs
Total cost
Divide by: unit cost
Units produced and sold
Total non-value added costs
Divide by: Units produced and sold
Potential unit cost reduction
> Yes, consultant’s estimate of cost reduction w
> Per-unit costs could be reduced by at least $7,
activities are feasible, further reductions may be
3. Assume that further activity analysis revealed the followin
support and $90,000 of direct labor. Now, what is the total po
additional reductions, can Mays maintain current sales? Incre
sharing, elimination, or selection?
 Unit cost to maintain sales
Selling price
Less: Profit per unit
Unit cost

Unit cost to expand sales (increase market share

Selling price
Less: Profit per unit
Unit cost

Cost reduction to maintain sales

Current unit cost
Less: unit cost to main sales
Unit cost reduction

Cost reduction to expand sales

Current unit cost
Less: unit cost to main sales
Unit cost reduction

Total potential reduction cost

Total non-value added costs
Saving by automating
Total
Divide by: Units produced and sold
Unit savings

Activity selection is the form of activity management

4. Calculate income based on current sales, prices, and costs.

assuming that the maximum cost reduction possible is achiev
selected?

Current:
Selling price
Units produced and sold
Sales
Less: Costs
Income

To maintain current marker share:

 Selling price
Units produced and sold
Sales
Less: Costs
Income

To expand sales (increase market share by 50%)

Selling price
Units produced and sold
Sales
Less: Costs
Income
nagement? What phases of activity analysis were provided by the consultant? What else remains to be done?

s a system-wide, integrated approach that focuses management’s attention on activities. It invloves two
mension and process dimension. Activity management identifies activities, measures their value and maintains
he consultant classified the activities but did not formally identify the activities as value-added or non-value-
give any recommendations for improvement of the performance. Presumably, the consultant had tentatively
eliminating activities that are non-value-added.Management also needs to determine how to minimize,
activities to achieve cost savings.

e-added costs as possible. Compute the cost savings per unit that would be realized if these costs were
tant correct in his preliminary cost reduction assessment? Discuss actions that the company can take to reduce
dded activities.

$ 125,000.00
180,000.00
122,000.00
100,000.00
170,000.00
80,000.00
75,000.00
added costs $ 852,000.00

$ 1,920,000.00
16
$ 120,000.00

added costs $ 852,000.00

produced and sold 120,000.00
ost reduction $ 7.10

nt’s estimate of cost reduction was on target.

could be reduced by at least $7, If improvements in value-added
asible, further reductions may be possible.

ty analysis revealed the following: switching to automated insertion would save $60,000 of engineering
ct labor. Now, what is the total potential cost reduction per unit available from activity analysis? With these
ays maintain current sales? Increase sales by 50 percent? What form of activity analysis is this: reduction,
tion?
intain sales
$ 14.00
4.00
$ 10.00

and sales (increase market share by 50%)

$ 12.00
4.00
$ 8.00

to maintain sales
$ 16.00
cost to main sales 10.00
$ 6.00

to expand sales
$ 16.00
cost to main sales 8.00
$ 8.00

reduction cost
value added costs $ 852,000.00
150,000.00
$ 1,002,000.00
Units produced and sold 120,000.00
8.35

is the form of activity management used here.

n current sales, prices, and costs. Now, calculate the income using a $14 price and a $12 price,
cost reduction possible is achieved (including Requirement 3’s reduction). What price should be

$ 18.00
duced and sold 120,000.00
$ 2,160,000.00
1,920,000.00
$ 240,000.00

rent marker share:

 $ 14.00
duced and sold 120,000.00
$ 1,680,000.00
918,000.00 Units produced and sold x (current unit cost - total potential reduction cost)
$ 762,000.00

s (increase market share by 50%)

$ 12.00
duced and sold 180,000.00
$ 2,160,000.00
1,377,000.00 Units produced and sold x (current unit cost - total potential reduction cost)
$ 783,000.00 GREATEST BENEFIT
al reduction cost)

al reduction cost)