GoodHealth Inc. manufactures two types of medical devices, A and B, and applies overhead on the basis of direct-labor hours. Anticipated overhead and direct-labor time for the upcoming accounting period are $710,000 and 20,000 hours respectively. Information about the company's product is as follows:

Product A

Estimated production volume, 2500 units

Direct material cost, $30 per unit

Direct labor per unit, 3 hours at $15 per hour

Product B

Estimated production volume, 3125 units

Direct material cost, $45 per unit

Direct labor per unit, 4 hours at $15 per hour

GoodHealth's overhead of $710000 can be identified with 3 major activities: order processing ($120000), machine processing ($500000) and product inspection ($90000) These activities are driven by the number of orders processed, machine hours worked and inspection hours, respectively. Relevant data for these activities is as follows:

	ORDERS PROCESSED	MACHINE HOURS WORKED	INSPECTION HOURS
A	350	23000	4000
B	250	27000	11000
Total	600	50000	15000

Management is very concerned about declining profitability, despite a healthy increase in sales volume. The decrease in income is especially puzzling because teh company recently a large renovation during which new, highly automated machines were installed; this machinery was expected to produce significant operating efficiencies.

1. Assuming the use of direct labor hour to apply overhead to production, compute the manufacturing cost of the A nd B products if the expected manufacturing volume is attained.

2. Assuming the use of activity based costing, compute the unit manufacturing costs of the A and B products if the expected manufacturing volume is attained.

3. GoodHealth's selling prices are based heavily on cost,

a. By using direct application hours as an application base, which product is over costed and which product is under costed? Calculate the amount of cost distortion for each product.

b. Is it possible that overcosting and undercosting (the cost distortion) and teh subsequent determination of selling prices are contributing the the company's financial difficulties? Explain.