Cases for Case Analyses

Digital Solutions, Inc., manufactures two component parts for the television industry:

  • Voltage Regulator: Annual production and sales of 50,000 units at a selling price of $52.50 per unit.
  • Mother Board: Annual production and sales of 25,000 units at a selling price of $72 per unit.

Digital Solutions includes all R&D and design costs in engineering costs. Assume that Digital Solutions has no marketing, distribution, or customer-service costs.

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The direct and overhead costs incurred by Digital Solutions on the Voltage Regulator and Mother Board are described as follows:

Voltage RegulatorMother BoardTotal
Direct materials costs (variable)$1,020,000$720,000$1,740,000
Direct manufacturing labor costs (variable)360,000240,000600,000
Direct machining costs (fixed)180,000120,000300,000
Manufacturing overhead costs:
Machining setup costs112,500
Testing costs600,000
Engineering costs480,000
Manufacturing overhead costs$1,192,500
Total costs$3,832,500

Digital Solution’s management identifies the following activity cost pools, cost drivers for each activity, and the costs per unit of cost driver for each overhead cost pool:

ActivityDescriptionCost DriverCost per Unit of Cost Driver
SetupPreparing the machine to manufacture a new batch of productsSetup hours$30 per setup-hour
TestingTesting components and final product (each unit is tested individually)Testing hours$2.40 per testing hour
EngineeringDesigning products and processes and ensuring their smooth functioningComplexity of product and processCosts assigned to products by special study

Over a long-run time horizon, Digital Solution’s management views direct materials costs and direct manufacturing labor costs as variable with respect to the units of Voltage Regulator’s and Mother Board’s produced. Direct machining costs for each product do not vary over this time horizon and are fixed long-run costs. Overhead costs vary with respect to their chosen cost drivers. For example, setup costs vary with the number of setup-hours. Additional information is as follows:

Voltage RegulatorMother Board
Production batch size500 units200 units
Setup time per batch15 hours18 hours
Testing and inspection time per unit of product produced2.5 hours5 hours
Engineering costs incurred on each product$200,000$280,000

Digital Solutions is facing competitive pressure to reduce the price of the Voltage Regulator and has set a target price of $48, well below its current price of $52.50. The challenge for Digital Solutions is to reduce the cost of the Voltage Regulator. Digital Solution’s engineers have proposed a new product design and process improvements for the “New Voltage Regulator” to replace the Voltage Regulator. The new design would improve product quality, and reduce scrap and waste. The reduction in prices will not enable Digital Solutions to increase its current sales. (However, if Digital Solutions does not reduce prices, it will lose sales.)

The expected effects of the new design relative to the Voltage Regulator are as follows:

  • Direct materials costs for the New Voltage Regulator are expected to decrease by $2.50 per unit.
  • Direct manufacturing labour costs for the New Voltage Regulator are expected to decrease by $0.70 per unit.
  • Time required for testing each unit of the New Voltage Regulator is expected to be reduced by 0.5 hours.
  • Machining time required to make the New Voltage Regulator is expected to decrease by 20 minutes. It currently takes one hour to manufacture one unit of Voltage Regulator. The machines are dedicated to the production of the New Voltage Regulator.
  • The New Voltage Regulator will take 7 setup-hours for each setup.
  • Engineering costs are unchanged.

Assume that the batch sizes are the same for the New Voltage Regulator as for the Voltage Regulator. If Digital Solutions requires additional resources to implement the new design, it can acquire these additional resources in the quantities needed. Further assume the costs per unit of cost driver for the New Voltage Regulator are the same as those described for Voltage Regulator.

Required

  1. Develop full product costs per unit for the Voltage Regulator and Mother Board, using an activity-based product costing approach. (25 marks)
  2. What is the markup on the full product cost per unit for the Voltage Regulator? (8 marks)
  3. What is Digital Solution’s target cost per unit for the New Voltage Regulator if it is to maintain the same markup percentage on the full product cost per unit as it had for the Voltage Regulator? (10 marks)
  4. Will the New Voltage Regulator design achieve the cost reduction targets that Digital Solutions has set? (21 marks)
  5. What price would Digital Solutions charge for the New Voltage Regulator if it used the same markup percentage on the full product cost per unit for the New Voltage Regulator as it did for the Voltage Regulator? (6 marks)
  6. What price should Digital Solutions charge for the New Voltage Regulator, and what next steps should Digital Solutions take regarding the New Voltage Regulator? (10 marks)
  7. Provide a recommendation given the case facts and your analysis. (10 marks)
  8. Pay attention to detail within your answers in terms of spelling, grammar, and formatting. (10 marks)
Activity/Competencies Demonstrated% of Total Grade
1.Identification and Analysis of Issues (80%)
a. Activity-based allocation of overhead/25
b. Markup on full product cost/8
c. Target cost per unit for the new voltage regulator/10
d. Achievements of cost reduction targets (ABC)/21
e. Price for the new voltage regulator/6
f. Next steps regarding the digital regulator/10
2.Recommendation (10%)
a. Provides appropriate recommendation given the case facts and analysis completed/10
3.Attention to Detail (10%)
a. Spelling, grammar, and formatting/10
Total/100

BUSI 3413: Intermediate Managerial Accounting 4

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