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 …show more content…
This would inflate the price for testing of that part, making in unappealing to a customer. The same could also be true of a higher depreciation expense machine in the main room, which would lead to a price that would be lower than it should be.
This approach would only be viable if the machine hours per machine per part tested were readily available at little or no cost. 5. The new system must be adapted to include a new pool for equipment with very high depreciation expenses. This new machine is very expensive and has a high depreciation cost (uses double declining). Sharing the burden of this machine without creating this new pool will lead to increased costs for the other tests. It was stated that as much as 25% of the customers would leave with those increased costs. During the first year, the machine will also add to the engineering costs ($75,000 Exhibit 7), leading to burden associated with the labor costs across all parts.
Again, these higher prices associated with parts being tested on the new machine would be accepted by customers because of the use of a new, superior machine. The price would be in line with what was expected. Other parts being tested on the older machines would not see a drastic price increase, just an increase due to the one year engineering expense. Also, the assumption for using this method is that the hours used by this machine for each part is readily available at