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Joseph Hansen, president of Electronica, Inc., was concerned about the end-of-the-year marketing report that he had just received. According to Kylee Hepworth, marketing manager, a price decrease for the coming year was again needed to maintain the companys annual sales volume of integrated circuit boards (CBs). This would make a bad situation worse. The current selling price of $27 per unit was producing a $3-per-unit profithalf the customary $6-per-unit profit. Foreign competitors keep reducing their prices. To match the latest reduction would reduce the price from $27 to $21. This would put the price below the cost to produce and sell it. How could the foreign firms sell for such a low price? Determined to find out if there were problems with the companys operations, Joseph decided to hire Carsen Hepworth, a well-known consultant and brother of Kylee, who specializes in methods of continuous improvement. Carsen indicated that he felt that an activity-based management system needed to be implemented. After three weeks, Carsen had identified the following activities and costs:

Batch-level activities:

Setting up equipment -187,500

Materials Handling -270,000

Inspecting Products-183,000

Product -sustaining activities:

Engineering support-180,000

Handling customer complaints-150,000

Filling Warranties-225,000

Storing goods -120,000

Expediting goods -112,500

How much is the total of non-value added costs? (Show with computation)

Unit level activities:

Using materials-750,000

Using Power-72,000

Manual insertion labor -375,000

Other direct labor -225,000

TOTAL 2,880,000

Carsen indicated that some preliminary activity analysis shows that per-unit costs can be reduced by at least $10.50. Since Kylee had indicated that the market share (sales volume) for the boards could be increased by 50 percent if the price could be reduced to $18, Joseph became quite excited.

How much is the total of non-value added costs? (Show with computation)

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