Reference no: EM133164685

Question - Exploiting Internal Linkages - Woodruff Company is currently producing a snowmobile that uses five specialized parts. Engineering has proposed replacing these specialized parts with commodity parts, which will cost less and can be purchased in larger order quantities. Current activity capacity and demand (with specialized parts required) and expected activity demand (with only commodity parts required) are provided.

Activities	Activity Driver	Activity Capacity	Current Activity Demand	Expected Activity Demand
Material usage	Number of parts	290,000	290,000	290,000
Installing parts	Direct labor hours	46,000	46,000	36,800
Purchasing parts	Number of orders	32,800	28,044	17,220

Additionally, the following activity cost data are provided:

Material usage: $15 per specialized part used; $15 per commodity part; no fixed activity cost.

Installing parts: $29 per direct labor hour; no fixed activity cost.

Purchasing parts: Four salaried clerks, each earning a $47,000 annual salary; each clerk is capable of processing 8,200 purchase orders. Variable activity costs: $1.80 per purchase order processed for forms, postage, etc.

Required -

1. Calculate the cost reduction produced by using commodity parts instead of specialized parts. Enter your answers as positive amounts. If required, round your answers to the nearest cent.

2. Suppose that 82,000 units are being produced and sold for $6,200 per unit and that the price per unit will be reduced by the per-unit savings. What is the new price for the configured product? If required, round your intermediate calculations and final answer to the nearest cent.

3. What if the expected activity demand for purchase orders was 13,940? How would this affect the answers to Requirements 1 and 2? If required, round your intermediate calculations and final answers to the nearest cent.