5-38 Perez Bags (PB) is a designer of high-quality backpacks and purses. Each design is made in small batches. Each spring, PB comes out with new designs for the backpack and for the purse. The company uses these designs for a year and then moves on to the next trend. The bags are all made on the same fabrication equipment that is expected to operate at capacity. The equipment must be switched over to a new design and set up to prepare for the production of each new batch of products. When completed, each batch of products is immediately shipped to a wholesaler. Shipping costs vary with the number of shipments. Budgeted information for the year is as follows: For the Year Ended February 28, 2014 $ Direct materials-purses Direct materials-backpacks Direct manufacturing labor-purses Direct manufacturing labor-backpacks Setup Shipping Design Plant utilities and administration Total Other budget information follows: Backpacks Number of bags Hours of production Number of batches Number of designs 5,850 1,600 163 2 Purses 3,250 2,625 62 3 334,750 456,300 97,500 117,000 51,750 72,000 162,500 253,500 $ 1,545,300 Total 9,100 4,225 225 5 i Requirements 1. Identify the cost hierarchy level for each cost category. 2. Identify the most appropriate cost driver for each cost category. Explain briefly your choice of cost driver. 3. Calculate the budgeted cost per unit of cost driver for each cost category. 4. Calculate the budgeted total costs and cost per unit for each product line. 5. Explain how you could use the information in requirement 4 to reduce costs. X