One Manila Inc.'s president, Zane Cruz, is concerned about the prospects of one of the firm's major products. The president has been reviewing a marketing report with Jom Lara, marketing product manager, for their top-of-the-line stereo amplifier. The report indicates another price reduction is needed to meet anticipated competitors' reduction in sales prices. The current selling price for OMI's amplifier is P35,000 per unit. It is expected that within three months OMI's two major competitors will be selling their comparable amplifiers for P30,000 per unit. This concerns CRUZ because OMI's current cost of producing the amplifiers is P31,500, which yields a P3,500 profit on each unit sold. The situation is especially disturbing because OMI had implemented an activity-based costing (ABC) system about two years ago. The ABC system helped them better identify costs, cost pools, cost drivers, and cost reduction opportunities. Changes made when adopting ABC reduced costs on this product by approximately 15% during the last two years. Now it appears that costs will need to be reduced considerably more to remain competitive and to earn a profit on the amplifier. Total costs to produce, sell, and service the amplifiers are as follows: Cost Item Per Unit Material Purchased components 10,750 All other material 4,250 Labor Manufacturing, direct 6,500 Setups 900 Material handling 1,800 Inspection 2,300 Machining Cutting, shaping, and drilling 2,100 Bending and finishing 1,400 Other Finished-goods warehousing 500 Warranty 1,000 Total unit cost 31,500 CRUZ has decided to hire DANIEL SHAW, a consultant, to help decide how to proceed. After a value-engineering analysis, SHAWsuggested that OMI adopt a jut-in-time (JIT) cell manufacturing process to help reduce costs. He also suggested that using target costing would help in meeting the new target price. By changing to a JIT cell manufacturing system, SEC expects that manufacturing direct labor will increase by P1,500 per finished unit. However, setups, material handling, inspection, and finished goods warehousing will all be eliminated. Machine costs will be reduced from P3,500 to P3,000 per unit, and warranty costs are expected to be reduced by 40%. Required: Determine OMI's unit target cost at the P30,000 competitive sales price while maintaining the same percentage of profit on sales as is earned on the current P35,000 sales price. If the just-in-time cell manufacturing process is implemented with the changes in costs noted, will OMI meet the unit target cost you determined in requirement 1? Prepare a schedule detailing cost reductions and the unit cost under the proposed JIT cell manufacturing process.
One Manila Inc.'s president, Zane Cruz, is concerned about the prospects of one of the firm's major products. The president has been reviewing a marketing report with Jom Lara, marketing product manager, for their top-of-the-line stereo amplifier. The report indicates another price reduction is needed to meet anticipated competitors' reduction in sales prices. The current selling price for OMI's amplifier is P35,000 per unit. It is expected that within three months OMI's two major competitors will be selling their comparable amplifiers for P30,000 per unit. This concerns CRUZ because OMI's current cost of producing the amplifiers is P31,500, which yields a P3,500 profit on each unit sold.
The situation is especially disturbing because OMI had implemented an activity-based costing (ABC) system about two years ago. The ABC system helped them better identify costs, cost pools, cost drivers, and cost reduction opportunities. Changes made when adopting ABC reduced costs on this product by approximately 15% during the last two years. Now it appears that costs will need to be reduced considerably more to remain competitive and to earn a profit on the amplifier. Total costs to produce, sell, and service the amplifiers are as follows:
|
Cost Item |
Per Unit |
|
|
Material |
Purchased components |
10,750 |
|
All other material |
4,250 |
|
|
Labor |
Manufacturing, direct |
6,500 |
|
Setups |
900 |
|
|
Material handling |
1,800 |
|
|
Inspection |
2,300 |
|
|
Machining |
Cutting, shaping, and drilling |
2,100 |
|
Bending and finishing |
1,400 |
|
|
Other |
Finished-goods warehousing |
500 |
|
Warranty |
1,000 |
|
|
Total unit cost |
31,500 |
CRUZ has decided to hire DANIEL SHAW, a consultant, to help decide how to proceed. After a value-engineering analysis, SHAWsuggested that OMI adopt a jut-in-time (JIT) cell manufacturing process to help reduce costs. He also suggested that using target costing would help in meeting the new target price. By changing to a JIT cell manufacturing system, SEC expects that manufacturing direct labor will increase by P1,500 per finished unit. However, setups, material handling, inspection, and finished goods warehousing will all be eliminated. Machine costs will be reduced from P3,500 to P3,000 per unit, and warranty costs are expected to be reduced by 40%.
Required:
- Determine OMI's unit target cost at the P30,000 competitive sales price while maintaining the same percentage of profit on sales as is earned on the current P35,000 sales price.
- If the just-in-time cell manufacturing process is implemented with the changes in costs noted, will OMI meet the unit target cost you determined in requirement 1? Prepare a schedule detailing cost reductions and the unit cost under the proposed JIT cell manufacturing process.
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