Analyze Life Force Fitness, Inc.

Activity-Base Usage (hrs. per unit) X Activity Rate per Hour = Activity Cost
  • Motor assembly 1.50 x $20 = $30.00
  • Final assembly 1.00 x 18 = 18.00
  • Testing 0.25 x 22 = 5.50
  • Rework 0.40 x 22 = 8.80
  • Moving 0.20 x 15 = 3.00
  • Activity cost per unit = $65.30

All of the activity costs are related to labor. Management must remove $2.00 of activity cost from the product in order to remain competitive.

Rework involves disassembling and repairing a unit that fails testing. Not all units require rework, but the average is 0.40 hours per unit. Presently, the testing is done on the completed assembly; but much of the rework has been related to motors, which can be tested independently prior to adding the motor to the treadmill during final assembly.

Thus, motor issues can be diagnosed and solved without having to disassemble the complete treadmill. This change will reduce the average rework per unit by one-quarter.

Determine the new activity cost per unit under the rework improvement scenario. Round your answer to 2 decimal places.

Answer

New Activity cost per unit = $63.10.

Explanation

The computation of the new activity cost per unit is shown below:

Activity Hours per Unit Per Hour Activity Cost
Motor assembly 1.5 $20 $30
Final assembly 1.00 $18 $18
Testing 0.25 $22 $5.50
Rework 0.30 (0.4 – (0.4 ÷ 4)) $22 $6.60
Moving 0.20 $15 $3.00
Activity cost per unit $63.10

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