LaMesa produces machine parts as a contract provider for a large manufacturing company. LaMesa produces two particular parts, shafts and gears. The competition is keen among contract producers, and LaMesa’s top management realizes how vulnerable its market is to cost-cutting competitors. Hence, having a very accurate understanding of costs is important to LaMesa’s survival. LaMesa’s president, Jose Rodriguez, has observed that the company’s current cost to produce shafts is \($21.35,\) and the current cost to produce gears is \($12.36.\) He indicated to the controller that he suspects some problems with the cost system because LaMesa is suddenly experiencing extraordinary competition on shafts, but it seems to have a virtual corner on the gears market. He is even considering dropping the shaft line and converting the company to a one-product manufacturer of gears. He asked the controller, Felix Bernhardt, to conduct a thorough cost study and to consider whether changes in the cost system are necessary. The controller collected the following data about the company’s costs and various manufacturing activities for the most recent month:

The controller was able to summarize the company’s total manufacturing overhead into the following pools:

Required

a. Calculate LaMesa’s current company-wide overhead rate based on direct labor hours.

b. Verify LaMesa’s calculation of overhead cost per unit of \($12.82\) for shafts and \($6.10\) for gears.

c. Calculate the manufacturing overhead cost per unit for shafts and gears using activity-based costing, assuming each of the five cost pools represents a separate activity pool. Use the most appropriate activity driver for assigning activity costs to the two products.

d. Comment on LaMesa’s current cost system and the reason the company is facing fierce competition for shafts but little competition for gears.

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Shafts Gears Production units. 50,000 10,500 Selling price... $31.86 $24 Overhead per unit (based on direct labor hours) $12.82 $6.10 Materials and direct labor cost per unit. $8.53 $6.26 Number of production runs. 10 20 Number of purchasing and receiving orders processed 40 100 Number of machine hours... 12,750 6,000 Number of direct labor hours.. 25,000 2,500 Number of engineering hours... 5,000 5,000 Number of material moves. 50 40 40