Kagle design engineers are in the process of developing a new “green” product, one that will

Kagle design engineers are in the process of developing a new “green” product, one that will
significantly reduce impact on the environment and yet still provide the desired customer
functionality. Currently, two designs are being considered. The manager of Kagle has told the
engineers that the cost for the new product cannot exceed $550 per unit (target cost). In the past,
the Cost Accounting Department has given estimated costs using a unit-based system. At the
request of the Engineering Department, Cost Accounting is providing both unit- and activitybased accounting information (made possible by a recent pilot study producing the activity-based
data).
Unit-based system:
Variable conversion activity rate: $100 per direct labor hour
Material usage rate: $20 per part
ABC system:
Labor usage: $15 per direct labor hour
Material usage (direct materials): $20 per part
Machining: $75 per machine hour
Purchasing activity: $150 per purchase order
Setup activity: $3,000 per setup hour
Warranty activity: $500 per returned unit (usually requires extensive rework)
Customer repair cost: $25 per repair hour (average)

Required:
1. Select the lower-cost design using unit-based costing.
Are logistical and post-purchase activities considered in this analysis?
2. Select the lower-cost design using ABC analysis.
3. What if the post-purchase cost was an environmental contaminant and amounted to $10 per
unit for Design A and $40 per unit for Design B?
Post-Purchase Cost

Design A
$
Design B
$
Assume that the environmental cost is borne by society. Now which is the better design?