WellCare Products manufactures a line of wheelchairs. During the past year, Well- Care sold its regular model for $720. Sales volume averages 20,000 units per year. Recently, a major competitor reduced the price of its regular model to $640. Well- Care's CEO was convinced that the price must be matched or sales would drop dramatically. Further research revealed that if WellCare could drop the selling price to $624 by the end of the year, the company could expand its share of the market by 20 percent. To maintain production of the product line, the current profit per unit must be maintained. The company currently produces 20,000 units per year and the CEO wants to know if the company can at least match the competitor's new price.
The plant controller and the cost accounting manager are convinced that the cost can be reduced by becoming more lean by reducing or eliminating wasteful activities. The amount of waste present in the system can be assessed by comparing the productive use of capacity (value added) with the total capacity. To help assess the waste, 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 (lb.)
|
380,000 400,000
|
$ 8,400,000
|
|
Labor (hr.)
|
91,200 96,000
|
1,200,000
|
|
Setups (hr.)
|
- 6,400
|
480,000
|
|
Material handling (moves)
|
- 16,000
|
1,120,000
|
|
Warranties (number repaired)
|
- 16,000
|
1,600,000
|
|
Total
|
|
$12,800,000
|
Required
1. Calculate the target cost for expanding the market share by 20 percent, assuming that the per-unit profitability is maintained as requested by the CEO.
2. Calculate the non-value-added cost per unit. Assuming that non-value-added costs can be reduced to zero, what is the per-unit cost? Can the target cost for expanding market share be achieved? What actions would you take if you were Well- Care's CEO?