(Activity-based costing) Patio Solutions 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 2000, the company produced 100,000 umbrellas, 10,000 gazebos, and 30,000 lawn chairs and incurred $2,000,000 of manufacturing overhead costs. The cost per unit for each product group in 2000 was as follows:

Umbrellas Gazebos Lawn Chairs Direct material $ 4.00 $ 40.00 $ 4.00 Direct labor 6.00 45.00 15.00 Overhead 8.00 60.00 20.00 Total $18.00 $145.00 $39.00 Because profitability has been lagging and competition has been getting more keen, Patio Solutions is considering implementing an activity-based costing system for 2001. In analyzing the 2000 data, management determined that all $2,000,000 of factory overhead could be assigned to four basic activities: quality control, setups, material handling, and equipment operation. Data from 2000 on the costs associated with each of the four activities follows:
Quality Control Setups Material Handling Equipment Operation Total Costs $100,000 $100,000 $300,000 $1,500,000 $2,000,000 Management determined that the following allocation bases and total 2000 volumes for each allocation base could have been used for ABC:
Activity Base Volume Quality control Number of units produced 140,000 Setups Number of setups 1,000 Material handling Pounds of material used 2,000,000 Equipment operation Number of machine hours 1,000,000 Volume measures for 2000 for each product and each allocation base were as follows:
Umbrellas Gazebos Lawn Chairs Number of units 100,000 10,000 30,000 Number of setups 200 400 400 Pounds of material 400,000 1,000,000 600,000 Number of machine hours 200,000 400,000 400,000

a. For 2000, determine the total overhead allocated to each product group using the traditional allocation based on direct labor hours.

b. For 2000, determine the total overhead that would have been allocated to each product group if activity-based costing were used. Compute the cost per unit for each product group.

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