(Using ABC to set price) The budgeted manufacturing overhead costs of Beaver Door Company for 1997 are as follows:

For the last 5 years, the cost accounting department has been charging overhead production costs based on machine hours. The estimated budgeted capacity for 1997 is 1,000,000 machine hours.
Phil Stolzer, president of Beaver Door, recently attended a seminar on activity-based costing. He now believes that ABC results in more reliable cost data that, in turn, will give the company an edge in pricing over its competitors. On the president’s request, the production manager provided the following data regarding expected 1997 activity for the cost drivers of the preceding budgeted overhead costs.

Linda Ryan, the VP of Marketing, received an offer to sell 5,000 doors to a local construction company. Linda asks the head of cost accounting to prepare cost estimates for producing the 5,000 doors. The head of cost accounting ac¬ cumulated the following data concerning production of 5,000 doors:

a. What is the predetermined overhead rate if the traditional measure of ma¬ chine 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 prior two cost systems will result in different cost estimates, which cost accounting system is preferable as a pricing policy and why?LO1

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TYPE OF COST Electric power Work cells Materials 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