Exhibit 3 Specialty Products Inc., manufactures household items sold at trade shows. The items, classified as either Trinkets or Widgets are manufactured on a common assembly line. Other than indirect labor (discussed further below), the plant operates at full capacity. The current cost accounting system allocates all overhead to the two products on the basis of machine hours. The following information applies to the month of July Trinkets SO Widgets 35 350 Number of Batches Produced Number of Units Number of Machine Hours Number of Inspections Number Engineering Changes 2400 1600 Total 115 2750 1775 175 Direct Labor Salary & Benefits per Unit Direct Material per Unit SAO S14 The General Ledger ako shows that the following amounts were spent on indirect resources: Indirect Labor Salaries and Benefits Computer Resources Utilities & Misc. Other $36,000 S12.000 $25.000 $73,000 A REQUIRED: Using the current cost accounting system, what cost per unit would be reported for the two products for the month of July? Trinkets unit Widgets /unit B. The current method for allocating overhand to the products is no longer acceptable. The production manager has heard about activity-based costing and has assembled some information for use in refining the current system. With the help of the accounting department, the manager has been able to establish the following information related to the key activities that consume the indirect resources: The indirect labor time is spent in the following proportions: Re-tooling before each batch of products 25% Engineering Changes 25% Inspecting Finished Products 25% Idle Time 25% Plant management would like to lay off a number of employees to eliminate the idle time, but unsuccessful negotiations have prevented such action so far. Computer Resources are used entirely for production planning, and vary with the number of batches in a given period. Utilities and Misc. Other Costs are almost entirely associated with running the machines, and so they tend to vary with the number of machine hours. REQUIRED: Design an Activity-Based Costing System, based on the provided information, and based on this system, determine the cost per unit for each product line for July. Show your calculations on the next page. Trinkets unit Widgets unit REQUIRED: Does this fimm have a problem with product cost cross subsidization? Explain briefly