Problem:
BENCHMARKING AND NON-VALUE-ADDED COSTS, TARGET COSTING
Karebien, Inc., has two plants that manufacture a line of hospital beds. One is located in St. Louis and the other in Oklahoma City. Each plant is set up as a profit center. During the past year, both plants sold the regular model for $810. Sales volume averages 20,000 units per year in each plant. Recently, the St. Louis plant reduced the price of the regular model to $720. Discussion with the St. Louis manager revealed that the price reduction was possible because the plant had reduced its manufacturing and selling costs by reducing what was called "non-value-added costs." The St. Louis plant's manufacturing and selling costs for the regular model were $630 per unit. The St. Louis manager offered to loan the Oklahoma City plant his cost accounting manager to helpit achieve similar results. The Oklahoma City plant manager readily agreed, knowing that his plant must keep pace-not only with the St. Louis plant but also with competitors. A local competitor had also reduced its price on a similar model, and Oklahoma City's marketing manager had indicated that the price must be matched or sales would drop dramatically. In fact, the marketing manager suggested that if the price were dropped to $702 by the end of the year, the plant could expand its share of the market by 20 percent. The plant manager agreed but insisted that the current profit per unit must be maintained. He also wants to know if the plant can at least match the $630-per-unit cost of the St. Louis plant and if the plant can achieve the cost reduction using the approach of the St. Louis plant.
The plant controller and the St. Louis cost accounting manager have assembled the following data for the most recent year. The actual cost of inputs, their value-added (ideal) quantity levels, and the actual quantity levels are provided (for production of 20,000 units). Assume there is no difference between actual prices of activity units and standard prices.
|
|
SQ
|
AQ
|
Actual Cost
|
|
Materials (lbs.)
|
427,500
|
450,000
|
$ 9,450,000
|
|
Labor (hrs.)
|
102,600
|
108,000
|
1,350,000
|
|
Setups (hrs.)
|
-
|
7,200
|
540,000
|
|
Materials handling (moves)
|
-
|
18,000
|
1,260,000
|
|
Warranties (no. repaired)
|
-
|
18,000
|
1,800,000
|
|
Total
|
|
|
$14,400,000
|
Required:
1. Calculate the target cost for expanding the Oklahoma City market share by 20 percent, assuming that the per-unit profitability is maintained as requested by the plant manager.
2. Calculate the non-value-added cost per unit. Assuming that non-value-added costs can be reduced to zero, can the Oklahoma City plant match the St. Louis plant's per-unit cost? Can the target cost for expanding market share be achieved? What actions would you take if you were the plant manager?
3. Describe the role benchmarking played in the effort of the Oklahoma City plant to protect and improve its competitive position.