Scalar Manufacturing produces automobile parts in batches in one continuous manufacturing process. The company uses direct labour hours to assign overhead to each part. Magda, the financial controller, is wondering what the reasons are for the low profits in 2012 and why the gear product line did not attain Scalar's 20% net profit margin target (net profit per unit on sale price). She has calculated the 2012 net profit per unit as follows:

Magda intends to implement activity-based costing at Scalar. Each part requires engineering design activity. Once the design is completed, the equipment can be set up for batch production. Once the batch is completed, a sample is taken and inspected to see if the parts are within the tolerances allowed. The manufacturing process has five activities: engineering, set-ups, machining, inspection, and processing. Overhead has been assigned to each activity using direct attribution and resource drivers:
Engineering ....................$ 80,000
Set-ups ...........................45,000
Machining .....................120,000
Inspection .......................60,000
Processing ......................35,000
Total overhead ...............$340,000
Magda has identified activity drivers for each activity and listed their practical capacities:

Following are the production data in 2012 for brake disks and gears:
...........................................Brake Disk ...........Gear
Number of units produced ...................5,000.......... 3,000
Engineering hours per unit..................... 0.05.......... 0.15
Number of set-ups .................................25.............. 9
Machine hours per unit ...........................2.5............. 1
Number of inspections ...........................250.......... 125
Instructions
(a) Using the activity-based approach, calculate the activity rates, the net profit per unit, and the net profit margin percentage for both the brake disk and the gear.
(b) Explain why the new profit margin percentages for the brake disk and the gear are different from what they were originally.

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Brake Disk Gear $43.00 Sales price per unit Manufacturing costs per unit: $35.00 10.00 1.20 Direct materials Direct labour (0.1 hour x $12/hour) (0.5 hour x $12/hour) Overhead (0.1 hour x $50/hour) (0.5 hour x $50/hour) 7.50 6.00 5.00 25.00 Total manufacturing cost per unit Net profit per unit Net profit margin percentage $18.80 53.7% 4.50 10.5% Engineering Numbe of Machine Number of Direct Labour Hours 20,000 HoursSet-ups 4,000 Inspections 1,500 Hours 250 7,000