Class Cabinets has one factory in which it produces two productlines. Walter manages the Wood Division, which produces woodcabinets, and Mary manages the Metal Division, which produces metalcabinets. Estimated unit production costs for the two typesof cabinets are as follows: 
Wood Metal
DirectMaterials $50.00 $35.00
Direct LaborCost $20.00 $30.00
ManufacturingOverhead $16.30 $24.45
Total Production Cost PerUnit $86.30 $89.45
Selling Price perunit $180 $160
Direct Labor Hours required perunit 2 3
Direct labor cost perhour $10 $10
At the end of the year, total overhead costs are allocated toeach division based on direct labor hours used. A breakdownof estimated yearly overhead costs is as follows:
Salaries
Water $50,000
Mary $50,000
Maintenance $20,000
Utilities $16,000
Property Tax $10,000
Annual straight-line depreciation
Equipment, Wooddivision $80,000
Equipment, Metaildivision $120,000
TotalOverhead $346,000
Demand for cabinets over the past several years has beensteady and is not expected to change. The MarketingDepartment estimates that approximately 10,000 wood cabinets and7,500 metal cabinets will be sold each year for the foreseeablefuture. Each manager's performance evaluation is based on thetotal production cost per unit for his or her product line. The manager that succeeds in reducing unit costs by the greatestamount from those estimated will earn a bonus.
Mary is considering purchasing a new machine for $500,000 thatwill last approximately 10 years and have no salvage value. If the machine is purchased, the direct labor hours required toproduct a metal cabinet will be reduced to 2.5 hours.
Requirements:
a. If the machine is purchased, what will be the totalunit costs of production for each type of cabinet, assuming allother cost and production estimates are correct?
b. From Mary's point of view, should the machines bepurchased? Discuss whether Mary and Walter should be givensole authory over which equipment to purchase for their respectivedivisions.
c. What information do you think is necessary to decidewhether to purchase the machine?
d. If the machineis purchased, do you think theperformance evaluation of Walter and Mary will be accurate and fairunder the current system?
e. Do you think an activity-based costing system wouldimprove the way unit production cost is determined in thisparticular company? Explain.
f. Besides better cost determination, what otherbenefits the ABC process may provide?
