BETTER BACKPACKS Inc produces backpacks from vegan leather, cotton and waterproof synthetic materials in a single factory. The basic product is a standard backpack made from vegan leather lined with cotton. The standard backpack is a high-quality item and has sold well for many years. Last year the company decided to expand its product line and produce deluxe backpacks for special orders. These backpacks differ from the standard in that they vary in size, contain the finest waterproof synthetic materials and have the buyer's name embossed on them. Bergman, the CEO was reviewing the cost reports. "That's ridiculous!" said Bergman. Why do we go on producing those standard backpacks when we're able to make so much more on the deluxe backpacks!" "I agree that the deluxe business is looking better and better," said the company's marketing manager. "And there seems to be plenty of deluxe work out there particularly since the competition has not been able to match our prices. Did you know that Herscal, our biggest competitor, charges over $60 a unit for its deluxe items? Now, that what I call ripping off your customers!" A breakdown of the manufacturing costs for each of BB'S product line is as follows. Standard Backpacks Monthly production 10,000 units Direct materials Deluxe Backpacks 3,000 units Vegan leather Cotton Waterproof synthetics Total direct materials $140,000 49,000 $24,000 16,500 0.00 15,750 189,000 56,250 Direct labor 8,000 24,000 MOH applied 100,000 30,000 Total manufacturing costs $297,000 $110,250 Manufacturing overhead is applied to products on the basis of machine hours. The estimated manufacturing overhead of $130,000 and each backpack requires 30 minutes of machine time.