1) Calculate the revised product costs(i.e. $60,000 of overhead) for the four pens, based on the activity information collected by Dempsey. (Hint: calculate the activity rate for each cost driver then create product income statements allocating overhead expenses based on ABC results).

2) What actions and new insights are more evident due to using ABC costs(i.e. compare the original income statement in exhibit #1 to the new activity-based costing statement that was calculated?

Exhibit 1 Traditional Income Statement Blue Black Red Purple Total Sales $75,000 $60,000 $13,950 $1,650 $150,600 Material Costs 25,000 20,000 4,680 550 50,230 Direct Labor 10,000 8,000 1,800 200 20,000 Overhead @300% 30,000 24,000 5,400 600 60,000 Total Operating $10,000 $8,000 $2,070 $300 $20,370 Income Return on Sales 13.60% 13.30% 14.80% 18.20% 13.50% Exhibit 2 Direct Costs and Activity Cost Drivers Blue Black Red Purple Total Production Sales Volume 50,000 40,000 9,000 1,000 100000 Unit Selling Price $1.50 $1.50 $1.55 $1.65 $6.20 Materials-unit cost $0.50 $0.50 $0.52 $0.55 $2.07 Direct labor hrs/unit 0.02 0.02 0.02 0.02 0.08 Machine hours/unit 0.1 0.1 0.1 0.1 0.4 Production runs 50 50 38 12 150 Setup time/run 4 1 6 4 15 Total setup time (hours) 200 50 228 48 526 Parts administration 1 1 1 1 4