2P5.38A (LO 1, 2) Kiddy Company manufactures bicycles. It recently received a request to manufacture 10 units of a mountain bike at a price lower than it normally accepts. Bruce, the sales manager, indicated that, if the order were accepted at that price, the company could expect additional orders from the same client. Bruce believes that, if Kiddy could offer this price in the market generally, sales of this bike would increase by 30%. Melany, president of Kiddy, is skeptical about accepting the order. The company has a policy of not accepting any order that does not provide a markup of 20% on full manufacturing costs. The price offered is $575 per bike.

The controller, Sanjay, has recently researched the possibility of using activity-based multiple overhead rates instead of the single rate currently in use. He has promised more accurate estimated overhead product costing, and Melany is curious about how this approach would affect product costing and pricing of the mountain bike.

The plant-wide overhead rate is based on an estimated volume of 10,000 direct labour hours and the following budgeted overhead:

Machine operating costs	$ 75,000
Rework labour	45,000
Inspection	25,000
Scrap costs	35,000
General factory overhead	120,000
Total	$300,000

Estimated activities for selected cost drivers for 2022:

Machine hours	25,000
Units reworked	600
Inspection hours	500
Units scrapped	140
Direct labour hours	12,000

Estimated data for the production of one mountain bike:

Direct materials	$160
Direct labour (7.5 hours/unit)	$180
Number of machine hours	6
Number of units reworked	0.25
Number of inspection hours	0.10
Number of units scrapped	0.05

Instructions

1. Using the single-rate method to assign overhead on a plant-wide basis, determine whether or not Kiddy should accept the order for the 10 mountain bikes. Explain your decision. a. Price of bicycle: $678
2. Using activity-based costing to assign overhead, determine whether or not Kiddy should accept the order for the 10 mountain bikes. Explain your decision. b. Price using ABC: $563.10

Assign overhead costs using traditional costing and ABC; compare results.