Question

Cost Data for Managerial Purposes

As an analyst at Delta Airlines, you are asked to help the operations staff. Operations has identied a new method of
loading baggage that is expected to result in a 30 percent reduction in labor time but no changes in any other costs. The
current labor cost to load bags is $2 per bag. Other costs are $1 per bag.
Required
a. What differential costs should the operations staff consider for the decision to use the new method next year? What
would be the cost savings per bag using it?
b. Describe how management would use the information in requirement ( a ) and any other appropriate information to
proceed with the contemplated use of the new baggage loading method.

Answer 1

Step-by-step explanation:

First of all, we should understand the problem.

A new method of loading baggage is supposed to reduce labor time by 30%, with other costs unchanged. This means that the cost to load bags will be reduced by 30%, other costs will remain the same 1 dollar per bag.

Differential cost is a cost which changes in response to a given cause of action. In this case, labor labor time is being reduced, Therefore, it is considered as differential cost.

If 30% is deducted from labor time, the labor cost to load bags will be reduced to $2*(1-0.3) = $2 - $0.6 = $1.4

Cost savings per bag would be:

$2 - $1.4 = $0.6 (a)

(b):

Management would use the knowledge of cost savings to decide whether or not to implement the new method.