Brilliant Accents Company manufactures and sells three styles of kitchen faucets: brass, chrome, and white. Production takes 25, 25, and 10 machine hours to manufacture 1,000-unit batches of brass, chrome, and white faucets, respectively. The following additional data apply:

BRASS CHROME WHITE

Projected sales in units 30,000 50,000 40,000

PER UNIT data:

Selling price $40 $20 $30

Direct materials $ 8 $ 4 $ 8

Direct labor $15 $ 3 $ 9

Overhead cost based on direct labor hours

(traditional cost system) $12 $ 3 $ 9

Hours per 1000-unit batch:

Direct labor hours 40 10 30

Machine hours 25 25 10

Setup hours 1.0 0.5 1.0

Inspection hours 30 20 20

Total overhead costs and activity levels for the year are estimated as follows:

Activity Overhead costs Activity levels

Direct labor hours 2,900 hours

Machine hours 2,400 hours

Setups $465,000 95 setup hours

Inspections $405,000 2,700 inspection hours

$870,000

a. Using the traditional cost system, determine the operating profit per unit for the brass style of faucet.

b. Determine the activity cost driver rate for setup overhead costs and inspection overhead costs.

c. Using the ABC system, for the brass style of faucet:

1. compute the estimated overhead costs per unit; and

2. compute the estimated operating profit per unit.

d. Explain the difference between the profits obtained from the traditional cost system and the ABC system. Which system provides a better estimate of profitability? Why?