Celestial Beings, Inc. is a manufacturer of incense. The company produces two main products: Sun and Moon. Currently the company uses a traditional costing system and allocates manufacturing overhead to production based on machine hours. Each unit of Sun requires 0.75 machine hours to product, and each unit of Moon requires 1.0 machine hours to produce. The company expects to make 2,000 units of Sun and 1,000 units of Moon in the upcoming period.

Due to pricing concerns, management is considering moving to an activity based costing system. Two activities and cost pools have been identified that account for 80% of the total budgeted manufacturing: machine setup $48,000 and product movement $32,000. The machine setup overhead costs are driven by number of setups. The production equipment is setup for every 10 units of Sun produced and for every 25 units of Moon produced. The product movement overhead costs are driven by number of moves. Sun is moved in groups of 25 units, and Moon is moved in groups of 50 units. The remaining 20% of the total budgeted manufacturing overhead costs is considered general factory overhead costs and will continue to be allocated to the companys products using machine hours even if the switch to ABC is made.

The following direct product cost information has been compiled for each product line:

	Sun	Moon
Direct Material	$5.25 per unit	$7.65 per unit
Direct Labor*	$7.50 per unit	$10.00 per unit

*Direct labor wages average $20 per hour.

Question 1 What is the total cost distortion of the Sun product line?

A.

$20,968

B.

$17,600

C.

$57,650

D.

$20,848

E.

$10,818

Question 2Assuming the company marks up costs 120% to determine sales price, by how much is the Moon product line currently being over/underpriced per unit?

A.

$19.36 overpriced per unit

B.

$22.93 underpriced per unit

C.

$21.12 overpriced per unit

D.

$17.60 underpriced per unit

E.

$38.72 overpriced per unit