Question

Connie Co. manufactures conduit for use in commercial building construction. Connie Co. has one product, LiquidTight. Connie’s costing system includes direct materials and three indirect cost categories. Indirect cost driver data from the two most recent periods are as follows:

                                                                       2017                       2018

• Cost per setup                                               $8,000                  $7,500

• Manufacturing cost per machine hour          $ 55                     $ 50

• Cost per engineering change                        $12,000                $10,000

In response to competitive pressures at the end of 2017, Connie Co.’s management set a target manufacturing cost per unit reduction of 10% to be achieved by the end of 2018. At the beginning of 2018 Connie Co. used value-engineering techniques to focus on the reduction of manufacturing costs. Management wants to evaluate whether value engineering has succeeded in reducing the target manufacturing cost per unit by 10%. Actual results for the LiquidTight product are as follows:

2017		2018
Units produced	3,500		4,000
Direct material cost / unit	$1,200		$1,100
Number of set-ups	70		80
Number of machine hours used	21,000		22,000
Number of engineering changes	14		10

1. Calculate the manufacturing cost per unit of LiquidTight in 2017.

2. Calculate the manufacturing cost per unit of LiquidTight in 2018.

3. Did Connie Co. achieve the target manufacturing cost per unit for LiquidTight in 2018?

4. Discuss the why the manufacturing cost per unit of LiquidTight changed from 2017 to 2018. What do you believe are the primary reasons for this change in cost?

5. Discuss the strategic implications of the value engineering techniques implement at Connie Co.

Answer 1

1. Manufacturing cost per unit in 2017
	Amount ($)
Direct Material	4,200,000	($ 1200*3500)
Add:
Setup cost	560,000	($ 8000*70)
Manufacturing cost	1,155,000	(21000*$ 55)
Engineering Change cost	168,000	($ 12000*14)
Total cost (A)	6,083,000
No of units (B)	3500
Cost per unit (A/B)	1,738
2. Manufacturing cost per unit in 2018
	Amount ($)
Direct Material	4,400,000	( $ 1100*4000)
Add:
Setup cost	600,000	($ 7500*70)
Manufacturing cost	1,100,000	(22000*$ 50)
Engineering Change cost	100,000	(10000* $ 10)
Total cost (A)	6,200,000
No of units (B)	4000
Cost per unit (A/B)	1,550

3. Cost per unit in 2017	$1,738
Less: 10 %	$173.80
Target cost	$1,564.20
Since actual cost is less than target cost Connie Co achieved its cost
4. Use of value Engineering technique is the reason of change in cost from 2017 to 2018