Wilson Electronics (a)

The position taken by Sally Jones is one that would be more of a long run oriented resource-usage proposal. By focusing on the A12 product design, if will streamline the method into other products that the company produces. While cutting materials handling would cut some hours, say 200 hours, it would not be enough to lay someone off since each employee in handling has a capacity of 1,571 hours. But the culmination of cutting material handling hours over multiple products would eventually allow the company to cut back on laborers. A new bill of activities for the revised version of the A12 box would garner a net savings of $0.47 per unit when compared to the original cost of the A12 of $82.72(see exhibit 1). The capacity based approach enables the measurement of change in usage based on the cost of used and unused capacity.

2. The point of view that Ed Branson supports is a resource spending point of view. It is almost the opposite of Sally Jones’ view in that it is judged by the savings in the short run. Cost pools are thought to be driven by salaries, wages, equipment, space costs, and so forth. Using these cost pools, we can figure out our saving would be $2,542 and our wages savings of around $90,000 (Exhibit 2). This total is less than the $100,000 increase in direct materials which would result in a loss of $7,468 by using Ed Branson’s view.

3. Using the spending point of view, you can save significantly towards your bottom line in a very short amount of time. On the other hand, the usage point of view will save money in the long run because future proposals would add to idle capacity so that eventually they could reduce capacity and save money. The best option might be some sort of hybrid between the two points of view. The company could save money in the short run until the true effects of the ABC costing method using usage could take affect and save the company money.

4. The proposal does meets the needs of the company for the time being since the $0.47 savings will help the company to respond to its competitor’s price reduction of $0.40. Alice Johnson should also emphasize that the ABC system can be implemented on other products made by the company which would save them more money and give them a competitive advantage in pricing. She should also remind management that this is a long-run change. Savings will become more apparent the more they use the resource usage base method. President Simms should like this proposal since it should meet the needs for the price reduction. It is important to note, however, that the person with the most knowledge of ABC costing, Mike Foster, is not with the company any longer which will make it more difficult to develop and further grow the ABC costing method at the company.

Exhibit 1

activity

driver

rate

Dollar

Prod

per unit

1

300

batches

$20.51

$6,153

100,000

$0.06

2

300

batches

19.61

5,883

100,000

0.06

3

2,400

unique parts

7.67

18,408

100,000

0.18

4

2,400

unique parts

11.74

28,176

100,000

0.28

5a

1,500

bundles

7.23

10,845

100,000

0.11

5b

16,800

containers

1.88

31,584

100,000

0.32

6a