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. It uses these designs for one 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.

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 cost per unit of cost driver for each cost category.

4. Calculate the total costs and the cost per unit for each product line.

5. Explain how you could use the information in requirement 4 to reduce costs.

Peach Bags Budgeted for Costs and Activities For the Year Ending February 28 $ 359,000 Direct materialspurses Direct materialsbackpacks 429,000 Direct labour-purses 99,000 Direct labour-backpacks 115,597 Setup Shipping Design 61,875 72,000 162,500 226,800 Plant utilities and administration $ 1,525,772 Total Other information: Backpacks Total Purses 3,350 Number of bags 5,900 9,250 1,600 2,600 4,200 Hours of production Number of batches Number of designs 145 80 225 2 3 5