CHAPTER 4 - ESSAY The Manhattan Company manufactures two models of compact disc players: a deluxe model and a regular model. The company has manufactured the regular model for years; the deluxe model was introduced recently to tap a new segment of the market. Since the introduction of the deluxe model, the company's profits have steadily declined, and management has become increasingly concerned about the accuracy of its costing system. Sales of the deluxe model have been increasing rapidly. The current cost accounting system allocates manufacturing overhead costs to the two products on the basis of direct labor hours. The company has estimated that this year it will incur $1,200,000 in manufacturing overhead costs and will produce 5,000 units of the deluxe model and 50,000 units of the regular model. The deluxe model requires 4 hours of direct labor, and the regular model requires 2 hours. Material and labor costs per unit and selling price per unit are as follows: Item Direct material cost Direct labor cost Selling price S Activity Purchase orders Quality control Product setups Machine maintenance Deluxe 50 S 60 200 Required (a) Compute the manufacturing overhead cost driver rate for this year. (10 points) (b) Determine the cost to manufacture one unit of each model. (10 points) (c) The company has decided to trace manufacturing overhead costs to four activities. Following are the amount of manufacturing overhead costs traceable to the four activities this year: Cost Driver Number of orders Number of inspection Number of setups Machine hours Cost (S) Regular 40 30 100 200,000 250,000 400,000 350,000 Cost Driver Units Demanded Deluxe 200 650 100 20,000 Regular 600 600 100 15,000 Compute the total cost to manufacture one unit of each model. (50 points) (d) Compare the manufacturing activity resources demanded per unit of the regular model and per unit of the deluxe model. Why did the old costing system under cost the deluxe model? (15 points) (e) Is the deluxe model as profitable as the company thinks it is under the old costing system? Explain. (15 points)