Case 5-4: Wilson Electronics Group II Aftab Usmani Alexander Derevin Carla Daniels Shantanu Kumar Singh

Wilson Electronics (A) Wilson Electronics builds components such as ducts, connectors and junction boxes used in power and data cable installation. Controller Mike Foster was key to taking the ABC initiative. Foster’s system focused on the costs of creating capacity for each manufacturing step. Idle capacity was viewed as a cost to the company, not charged to the customers. Unfortunately, Mike Foster left the company. Bill Simms wanted the new controller Alice Johnson to show how ABC system will help make strategic decisions.

The Cost Accounting System The ABC model building process by Foster included the following : Gathering activity definition, resource driver , and activity data. Creating ABC model to show changes in product design on activity frequencies and, therefore, costs. Inputting data into the model.

A12 Junction box cost reduction proposal Alice wanted ABC to show cost reduction in the A12 junction box. In order to be competitive with other companies, A12 cost should go down by $0.40/unit. Proposal was made to substitute a new part in place of several old parts. Cost increase in parts because of this new assembly = $1.00/unit .

The meeting Alice discussed her proposal with Sally and Ed. Sally used ABC model to show changes in activity frequency with new reduction in parts. Savings = $0.47/unit. Ed wanted to see real cost savings in terms of employee reduction. Tried to combine new idle capacity with existing one.

Describe the position taken by Sally Jones Describe the position taken by Sally Jones. Prepare a new bill of activities for the revised version of the A12 junction box, based on the old bill of activities provided in Exhibit 3. How much cost savings per unit will be realized? Sally Jones used the ABC model to adjust the activity driver counts affected by the change in parts. Then, based on the ABC rates, she calculated the total ABC cost savings. Cost Savings/Unit = $82.24 - $82.72 = ($0.47) Assumption: The project’s $10,000 upfront cost for product engineering work and $9,500 cost for process engineering work would be spread over many years to come. So they are not included in the current cost savings.

Capacity-based Approach How does the capacity – based approach to designing an ABC system enable the measurement of changes in resource usage? Capacity based approach enables changes in resource usage by relating the changes in the parts to the activity driver. In this case, the changes in the parts were linked to the activity Issue Purchase Orders for Parts.

Describe the position taken by Ed Branson on what is meant by cost savings. Prepare a schedule of employee time savings and a schedule of cost savings according to this viewpoint. See the cost savings as shown by Sally to reflect in reductions in employee headcount and payroll. Link the reduction in activity demand to the existing idle employee capacity in each department.

How much cost savings will be realized in the next year in total and per unit for A12 junction box according to this viewpoint? Purchasing Department and Assembly Department will realize the cost savings by reducing 1 person and 2 persons, respectively. Savings in Purchasing Department = $30,373.33 Savings in Assembly Department = 2 * $29,800 = $59,600.00 Employee severance = $15,000 Total Savings in Terms of Employee Salaries = $89,973.00 -$15,000 = $88,473.00 Total Savings considering material costs = $88,473.00 - $100,000 = ($11,527.00) Total Profit / Loss per Unit = ($0.12/unit)

Available Idle Time Estimates in Analysis? We should not take the temporary idle time in our estimates. Can be misleading as the work in next period can overwhelm the department and they may not have the idle resources. Take into consideration only long-standing idle time. If any exist, factor in changes in resources We should factor in changes in resource due to cyclical nature of business.

Our Point of View For any gains to be realized by the Wilson Electronics, the savings shown in Sally’s ABC model should get reflected in terms of reduction in employees. Sally’s proposal does not consider this. Ed’s proposal has two wrong assumptions 1) Taking temporary idle time into consideration. 2) He thinks employee reduction in headcount as the only effective way to save. He is not considering the savings in other cost pools like Supervision, Supplies and utilities, Equipment which constitutes 22% of the total savings. I would agree more with the Ed’s viewpoint if it takes care of the above loophole in his reasoning.

Net Savings Net savings = Total Savings in Terms of Employee Salaries + Overhead Cost - Increase in Material costs $88473.00 + $89973.00 * 0.22 - $100,000.00 = $8267.06 Net Dollar Savings = $0.082/unit

Meeting Wilson’s Strategic Needs Does this proposal meet the strategic needs of the company, with respect to competition on the A12 junction box product line? What other advice would you give Alice Johnson to help her prepare for the management team meeting? The proposal has gains of only $0.12/unit from the competitor’s price. So it fails to meet the strategic needs of the company. Total $ amount of idle capacity existing after parts reduction: $109,025.80 = 0.325 * $30,373.33 + 0.25 * $29,066.67 + 0.14 * $29,509 + 0.162 * $30,510.00 + 2.779 * $29,800.00 Existing $ amount of idle capacity: $60,453.70 = 0.75 * $30,373.33 + 0.25 * $29,066.67 + 0.25 * $29,509 +0.25 * $31,100 + 0.5 * $30,510.00 + 0 * $29,800.00

Meeting Wilson’s Strategic Needs Overhead = 109025.8 * 0.22 = $23985.50 Total $ amount of savings = $93,465.00 $109025.80 + $60453.70 + $23985.50 - $100,000 Total $ amount of savings/Unit = $0.93/Unit If Alice is able to somehow use the idle capacity then the company can reap huge benefits out of it. One way to achieve it is by increasing production of A12 junction boxes. This will use the idle capacity. Selling the increased volume should not be problem as this is a commodity business and the competition is mainly due to the price.

Potential response of President Simms Simms wanted the ABC system to help in making better decisions that would improve overall company profitability. The data presented by Johnson would be solid enough to show how managers can make effective decisions, based on the changes in resources with change in parts. Simms should give the go-ahead to this project, because it will help in taking strategic decisions for the entire Wilson’s operation.

Will the initiative be successful? Assuming Simms takes Alice Johnson’s recommendation and commits the resources necessary to update Wilson’s ABC model, do you think overall initiative will be successful? If we get similar cost reductions due to strategic changes in other products, Wilson will be able to get huge benefits from the ABC system.