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Problem - Hydraulic Solutions manufactures hydraulic components for large automated machine tools. Hydraulics' sales for its main valve are declining because of aggressive pricing by competitors. Hydraulics' valve sells for $775 compared to the competitor's price of $605 for the same valve. The marketing manager has determined that a decrease to a new price of $600 is necessary to regain market share and annual sales of 3,200 units. Hydraulic Solutions uses Activity Based Costing (ABC) to determine product costs and profitability. Current cost data based on sales of 3,200 valves follows:
Actual Cost Item (cost driver)
ABC
Rate
Actual Cost Driver Usage Activity
Direct materials (square feet of sheet metal)
$66.50
12,000 sq. ft.
Direct labor (labor hours)
$20.00
25,000 labor hrs.
Inspections (# inspections)
$50.00
2,600 inspections
Materials handling (# of purchases)
$15.50
8,000 purchases
Set-ups (# of set-ups)
$120.00
500 set-ups
Actual Cost Driver
Usage Activity
9,000 sq. ft.
23,000 labor hrs.
2,100
6,000
500
Required - show all of your calculations to support your answers:
Calculate the product cost per unit after the design changes are implemented. Did Hydraulic Solutions meet the target cost per unit at the new $600 price?
Given your analysis what strategy do you suggest for Hydraulic?
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