1. The existing system at ETO began to fail because direct labor hours per lot began to decrease due to vendor certification. Vendors would do the primary testing and ETO would only be required to test a small sample of each lot to verify the results were valid. In the marketplace, ETO’s prices were lower than outside competition for testing complex parts, yet the prices were higher for elementary testing. Another important factor to consider is that engineering support increased. This led to additional burden costs, which also varied from part to part. High-technology components were tested using more automated test equipment. These tests took longer, but did not require as many hours of direct labor. The test equipment also had a higher depreciation expense. It is common for a cost system to become obsolete when the process experiences increased automation. In these situations parts being tested through automation are not charged enough overhead while other, more labor intensive tests are charged too much (Cooper, HBR, Reading Packet p50-51). 2. Formulas used for calculations can be found in the Appendix: (Most values from Exhibit 3, 5, and 6. See Appendix for additional calculations.) Existing: Direct Labor Hours x (100% + 145%)
Manager: Direct Labor Hours x (100% + 20%) + Total Machine Hours x 80.1 Consultant: Direct Labor Hours x (100% + 20%) + Main Room Machine Hours x 63.34 + Mechanical Room Hours x 112.63
| Direct Labor
| Main Room
| Mech Room
| Total Hours
3. The consultant’s approach (c)...
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