Question - Drayton Company manufactures equipment used by construction companies. It currently produces a product with 30 parts, but redesign has reduced the number of parts to 9. The current activity capacity and demand for the 30 part configuration and the expected demand for the redesigned 9 part configuration are provided below:
Activities Activity driver Activity capacity Current activity demand Expected activity demand
Materials usage Number of parts 300,000 300,000 90,000
Assembly Direct labor hours 20,000 20,000 6,000
Purchasing parts Number of orders 20,000 16,000 8,000
Materials usage has a rate of $5 per part and no fixed costs. Assembly has a rate of $20 per labor hour with no fixed component. Purchasing requires clerks who can process 5,000 purchase orders. Each clerk earns $40,000 per year. There is also a $1 per order processing cost.
What is the cost saving from purchasing parts?