(Using ABC to set price) The budgeted manufacturing overhead costs of Up- and-Out Door Company for 2006 are as follows:

For the last live years, the cost accounting department has been charging overhead production costs based on machine hours. The estimated budgeted capacity for 2006 is 1,000,000 machine hours.
The president of Up-and-Out Door recently attended a seminar on acti\ ity-based costing. She now believes that ABC results in more reliable cost data that, in turn, will give the company an edge in pricing over its competitors. At the president’s request, the production manager provided the following data regarding expected 2006 activity for the cost drivers of the preceding budgeted overhead costs.

Peter Reed, the VP of marketing, received an offer to sell 5,000 doors to a local construction company, Peter asked the head of cost accounting to pre¬ pare cost estimates for producing the 5,000 doors. The head of cost account¬ ing accumulated the following data concerning production of 5,000 doors:

a. What is the predetermined overhead rate if the traditional measure of machine hours is used?

b. What is the manufacturing cost per door as presently accounted for?

c. What is the manufacturing cost per door under the proposed ABC method?

d. If the two cost systems will result in different cost estimates, which cost accounting system is preferable as a pricing base and why?

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Type of Cost Electric power Work cells Material handling Quality control inspections Product runs (machine setups) Total budgeted overhead costs Cost Amount $ 500,000 3,000,000 1,000,000 1,000,000 500,000 $6,000,000