ABC Company manufactures a product that is available in both a Deluxe model and a Regular model. The company has manufactured the Regular model for years. The Deluxe model was introduced several years ago to tap a new segment of the market. Since introduction of the Deluxe model, the company's profits have steadily declined and management has become increasingly concerned about the accuracy of its product costing system. Sales of the Deluxe model have been increasing rapidly. Manufacturing overhead is allocated to products on the basis of direct labor hours. For the upcoming year, the company has estimated that it will incur $900,000 in manufacturing overhead cost and produce 5,000 units of the Deluxe model and 40,000 units of the Regular model. The Deluxe model requires two hours of direct labor time per unit, and the Regular requires one hour. Material and labor costs per unit are as follows: Required: MODEL Direct Materials Direct Labor Deluxe $40 Regular $25 $14 $7 1. Using direct labor hours as the base for allocating overhead costs to products, determine the cost per unit for each model and the total gross margin for each product for the upcoming year. The company's pricing policy is cost plus 40%. 2. Management is considering using activity-based costing to allocate manufacturing overhead costs to products. After interviews with company employees, it was determined that the activity-based costing system would have the following four activity cost pools: Activity Cost Pool Purchasing Processing Scrap Shipping Activity Measure Purchase orders issued Machine-hours Scrap issues ordered Number of shipments Activity Measure Purchase orders issued Machine-hours Scrap orders issued Number of shipments Estimated Overhead Cost $204,000 182,000 379,000 135,000 $900,000 Expected Activity Next Year Deluxe Regular Total 200 400 600 20,000 15,000 35,000 1,000 1,000 2,000 250 650 900 Using activity-based costing, determine the cost per unit for each model and the total gross margin for each product for the upcoming year. 3. Based on your above analysis comparing costing methods, what have you learned? 4. What actions might management consider with respect to the discoveries resulting from this cost analysis?