Fancy Flange Company manufactures a variety of special flanges for numerous customers. Annualcapacity-related (manufacturingoverhead) costs are $5,400,000 and the practical capacity level of machine hours is 160,000. The company uses planned machine hours as the cost driver in determining the plantwide cost driver rate. Until lastyear, the company used approximately 90,000 machine hours per year. Lastyear, competition increased and demand for thecompany's flanges fell. In the face of continuingcompetition, the company estimates that it will use 75,000 machine hours in the coming year. The company sets its prices at 170% of production cost per unit.

Requirements

(a)

What is likely to happen if demand decreases further and Fancy Flange continues to recompute its cost driver rate using the sameapproach?

Using thecompany's approach, the cost driver rate before the decrease in demand was $______ per machine hour. With the drop indemand, the cost driver rate will be $_______ per machine hour.

(b)

Advise the company on choosing a cost driver quantity for computing cost driver rates and explain why you advocate your choice of quantity.