(Activity-based costing) Outdoor Life makes umbrellas, gazebos, and lawn chairs. The company uses a traditional overhead allocation scheme and assigns overhead to products at the rate of $10 per direct labor hour. In 1997, the company produced 100,000 umbrellas, 10,000 gazebos, and 30,000 lawn chairs and in¬ curred $1,000,000 of manufacturing overhead costs. The cost per unit for each product group in 1997 was as follows:

Because profitability has been lagging and competition has been getting more keen, Outdoor Life is considering implementing an activity-based costing system for 1998. In analyzing the 1997 data, management determined that all $2,000,000 of factory overhead could be assigned to four basic activities: quality control, setups, materials handling, and equipment operation. Data from 1997 on the costs associated with each of the four activities follows:

a. For 1997, determine the total overhead allocated to each product group using the traditional allocation based on direct labor hours.

b. For 1997, determine the total overhead that would be allocated to each prod¬ uct group if activity-based costing were used. Compute the cost per unit for each product group.

c. Outdoor Life has a policy of setting selling prices based on product costs. Flow would the sales prices using activity-based costing differ from those obtained using the traditional overhead allocation?LO1

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Direct materials Direct labor Overhead Total UMBRELLAS $ 4.00 6.00 8.00 $18.00 GAZEBOS $ 40.00 LAWN CHAIRS $ 4.00 15.00 45.00 60.00 20.00 $145.00 $39.00