Most clients are referred to the company by potential employers who pay for the tests. Revenue and costs related to the tests, for the most recent fiscal year, are detailed in the table below.

Setting up equipment to conduct a test is the responsibility of three highly skilled technicians, one of whom is Emmet Wilson, founder and owner of the company. Tests T2 to T5 are high-volume tests that are conducted in batches of 100 tests per batch. Thus, for example, T5 is run approximately three times a day to annually process 92,000 tests in 920 batches. T1 is a test with relatively low demand. However, it is run almost every day (350 runs per year), so that results can be quickly communicated to employers. This fast turnaround represents a significant competitive advantage for the company.

ABC cost of the five tests. In the past year, overhead amounted to $3,256,500,as follows:

Overhead                                      Costs

Setup labor ……………………..  $ 875,000

Equipment …………………….    1,400,000

Rent ……………………………          390,000

Billing …………………………          231,500

Clerical ………………………..         160,000

Other …………………………..        200,000

Total ……………………………   $3,256,500

Emmet’s analysis of these six overhead cost categories was as follows:

Required

a. Based on Emmet’s assumptions, calculate the ABC cost per unit and profit per unit of each test.

b. Should Emmet lower the price of the T1 test, or keep the current price and risk losing the business of Nuclear Systems?

c. Assume that Emmet, based on his ABC analysis, decides not to lower the price of the T1 test. What will be the effect on annual company profit if the company loses the business of Nuclear Systems (i.e., T1 tests decrease by 1,750)?

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Profitability of Tests for the Fiscal Year Ending December 31, 2011 Total T1 T2 тз T4 T5 Number of tests per year Number of runs 72,000 3,500 52,000 80,000 92,000 299,500 3,310 350 520 720 800 920 $ 35.00 $ 25.00 $ 23.00 $ 21.00 $ Price per test 20.00 Less: Material cost 12.00 10.50 7.50 7.35 5.85 Direct labor at $18 per hour Overhead at $10 per labor dollar 1,50 1.00 1.10 1.10 1.10 15.00 10.00 11.00 11.00 11.00 Total cost 21.50 3.50 $ 28.50 $ 6.50 $ $22,750 $182,000 $244,800 $52,500 $520,000 $792,000 $ 5,250 $ 52,000 $ 79,200 19.60 19.45 17.95 Profit per test Total profit Total overhead 1.55 $ $124,000 $ 188,600 $ 762,150 $880,000 $1,012,000 $3,256,500 $ 88,000 $ 101,200 $ 325,650 3.40 2.05 Total labor