25-15 ACTIVITY-BASED COSTING AND ACTIVITY-BASED MANAGEMENT, AUTOMOTIVE SUPPLIER O'Sullivan Company is an automotive component supplier. O'Sullivan has been approached by Honda Canada's Alliston, Ontario, plant to consider expanding its production of part 242 to a total annual quantity of 2,000 units. This part is a low-volume, complex product with a high gross margin that is based on a proposed (quoted) unit sales price of $7.50. O'Sullivan uses a traditional costing system that allocates indirect manufacturing costs based on direct labour costs. The rate currently used to allocate indirect manufacturing costs is 400 percent of direct labour cost. This rate is based on the $3,200,000 annual factory overhead cost divided by $800,000 annual direct labour cost. To produce 2,000 units of 24Z2 requires $5,000 of direct materials and $1,000 of direct labour. The unit cost and gross margin percentage for part 24Z2 based on the traditional cost system are computed as follows: Per Unit (+2,000) Total Direct materials Direct labour Indirect production: (400% direct labour) Total cost Sales price quoted Gross margin Gross margin percentage $ 5,000 1,000 4,000 $10,000 $2.50 0.50 2.00 $5.00 7.50 $2.50 33.3% Cost A their traditional have been collected me management of O'Sullivan decided to examine the effectiveness of the tem versus an activity-based costing system. The following data have a team consisting of accounting and engineering analysts Activity Centre Quality Production scheduling Factory Overhead Costs (annual) S 500,000 50,000 700,000 300,000 50,000 1,600,000 $3,200,000 Setup Shipping Shipping administration Production Total indirect production cost Annual Cost-Driver Quantity Activity Centre: Cost Drivers 10,000 Quality: Number of pieces scrapped 500 Production scheduling and setup: Number of setups 60,000 Shipping: Number of containers shipped 1,000 Shipping administration Number of shipments 10,000 Production: Number of machine-hours The accounting and engineering team has performed activity analysis and provides the lowing estimates for the total quantity of cost drivers to be used to produce 2,000 units of me 2472: Cost Driver Pieces scrapped Setups Containers shipped Shipments Machine-hours Cost-Driver Consumption 120 4 10 REQUIRED 1. Prepare a schedule calculating the unit cost and gross margin of part 24Z2 using the activity- based costing approach. 2. Based on the ABC results, which course of action would you recommend regarding we proposal by Honda Canada? List the benefits and costs associated with implementing a ABC system at O'Sullivan