BikeWorks Inc., is a small bicycle manufacturing company that produces two types of bicycles: "Standard" and "Mountain$.$ BikeWorks is facing increasing cost pressures in today's competitive market. In an effort to gain better insights into its cost structure and optimize resource allocation, the company decided to implement Activity$-$Based Costing $($ABC$)$ accounting. Traditional cost allocation methods did not provide a detailed breakdown of costs, making it difficult to pinpoint areas of inefficiency.

This case study explores how ABC accounting helped BikeWorks Inc. identify cost drivers, improve cost allocation accuracy, and make more informed strategic decisions. The increasing competition is imposing cost reductions while maintaining product quality and customer satisfaction. The company is seeking your assistance as an accountant to provide guidance on how to address company$$s challenges, and conduct a comprehensive cost analysis to help the company understand its cost structure better based on ABC costing method. Below is $2023$ information for each product:

Standard bikes Mountain bikes

Units produced and sold $20,0005,000$

Selling price per unit $ $80$ $ $200$

Plastic per unit $ $15$ $ $23$

Metal per unit $ $25$ $ $27$

Direct labor rate $ $20$ per labor hour $ $25$ per labor hour

Direct labor hours $1,5002,000$

Design hours $5001000$

Machining hours $8001200$

Plant surface $($m$2)15,000$ m$25,000$ m$2$

Number of inspections $650350$

Maintenance hours $12080$

Production runs $7030$

Indirect costs are as follows:

Activity Activity cost $($in dollars$)$ Cost driver

Design costs $ $120,000$ Design hours

Engineering costs $260,000$ Machine hours

Rent costs $40,000$ Plant surface

Inspection costs $60,000$ Inspection hours

Maintenance costs $30,000$ Maintenance hours

Setup costs $25,000$ Production runs

BikeWorks Inc. provided additional details concerning further indirect costs:

Standard bikes Mountain bikes

Selling & advertising costs $8\%$ of sales revenue $17\%$ of sales revenue

Shipment costs $ $4$ per unit sold $ $24$ per unit sold

Total administrative costs amounted to $ $480,000,$ and were allocated based on the plant surface.

Required:

$1-$ Calculate the total cost per unit for each product based on traditional costing system $($simple costing$)$ assuming that the company was using machining hours as a cost allocation base.

$2-$ Calculate the operating income per unit for each product as per traditional costing system. Deduce the total operating income of the company.

$3-$ Describe briefly why Activity$-$based costing is important for companies.

$4-$ Calculate the total cost per unit based on activity$-$based costing system.

$5-$ Calculate the net income per unit for each product as per activity$-$based costing system. Deduce the total operating income of the company.

$6-$ Specify whether total cost of each product is underestimated or overestimated. Explain why the traditional costing and ABC costing systems did not generate the same total costs.

$7-$ Explain briefly how the company may benefit from using the activity$-$based costing system, by underscoring the benefits of ABC management.