Digital Solutions, Inc., manufactures two component parts for the television industry: Voltage Regulator: Annual production and sales of 50,000 units at a selling price of $48.72 per unit. Mother Board: Annual production and sales of 25,000 units at a selling price of $72 per unit. Digital Solutions includes all R&D and design costs in engineering costs. Assume that Digital Solutions has no marketing, distribution, or customer-service costs. The direct and overhead costs incurred by Digital Solutions on the Voltage Regulator and Mother Board are described as follows: Voltage Regulator Mother Board Total Direct materials costs (variable) Direct manufacturing labor costs (variable) Direct machining costs (fixed) Manufacturing overhead costs: Machining setup costs Testing costs Engineering costs Manufacturing overhead costs Total costs $1,020,000 360,000 180,000 $720,000 240,000 120,000 $1,740,000 600,000 300,000 $1,192,500 $3,832,500 112,500 600,000 480,000 Digital Solutions management identifies the following activity cost pools, cost drivers for each activity, and the costs per unit of cost driver for each overhead cost pool: Activity Setup Preparing the machine to manufacture a new batch of products Testing Testing components and final product (each unit is tested individually) Setup hours Testing hours $30 per setup-hour $2.40 per testing hour Description Cost Driver Cost per Unit of Cost Driver Engineering Designing products and processes and ensuring their smooth functioning Complexity of product and process Costs assigned to products by special study. Production batch size Setup time per batch Testing and inspection time per unit of product produced Engineering costs incurred on each product 500 units 15 hours 2.5 hours $200,000 200 units 18 hours 5 hours $280,000 Over a long-run time horizon, Digital Solutions management views direct materials costs and direct manufacturing labor costs as variable with respect to the units of Voltage Regulators and Mother Boards produced. Direct machining costs for each product do not vary over this time horizon and are fixed long-run costs. Overhead costs vary with respect to their chosen cost drivers. For example, setup costs vary with the number of setup-hours. Additional information is as follows: Voltage Regulator Mother Board Digital Solutions is facing competitive pressure to reduce the price of the Voltage Regulator and has set a target price of $48, well below its current price of $52.50. The challenge for Digital Solutions is to reduce the cost of the Voltage Regulator. Digital Solutions engineers have proposed a new product design and process improvements for the New Voltage Regulator to replace the Voltage Regulator. The new design would improve product quality, and reduce scrap and waste. The reduction in prices will not enable Digital Solutions to increase its current sales. (However, if Digital Solutions does not reduce prices, it will lose sales.) The expected effects of the new design relative to the Voltage Regulator are as follows: Direct materials costs for the New Voltage Regulator are expected to decrease by $2.50 per unit. Direct manufacturing labour costs for the New Voltage Regulator are expected to decrease by $0.70 per unit. Time required for testing each unit of the New Voltage Regulator is expected to be reduced by 0.5 hours. Machining time required to make the New Voltage Regulator is expected to decrease by 20 minutes. It currently takes one hour to manufacture one unit of Voltage Regulator. The machines are dedicated to the production of the New Voltage Regulator. The New Voltage Regulator will take 7 setup-hours for each setup. Engineering costs are unchanged. Assume that the batch sizes are the same for the New Voltage Regulator as for the Voltage Regulator. If Digital Solutions requires additional resources to implement the new design, it can acquire these additional resources in the quantities needed. Further assume the costs per unit of cost driver for the New Voltage Regulator are the same as those described for Voltage Regulator.

Required 1) Develop full product costs per unit for the Voltage Regulator and Mother Board, using an activity-based product costing approach.