HOW TO SOLVE IT

Activity measures Estimated overhead Product 1 Product 2 Supporting direct labour hours $300,000 3,000 3,000 Quality review 75,000 120 110 Product testing 1 5,000 90 90 Calculate the unit cost for each product under ABC system B. Williams Ltd. manufactures and sells heavy duty equipment needed by construction workers in Canada. The manager claims that the equipment needed to make nail guns has been totally depreciated or worn out. The manager has to make a decision whether he should rent a new equipment so the nail guns can be produced internally, which would cost $150,000 per year or he should purchase the nail guns from an outside supplier for $19 each and discontinue production of nail guns internally. With the activity level as 50,000 units. the cost of producing the nail guns internally with the old equipment is: Direct Material $T Direct Labour 10 Variable Overhead 1.90 Fixed overhead {includes $2 of depreciation, $1 .6 for supervision 8.60 and $5 of general company overhead) Total Cost $27.50 According to the manufacturer the new equipment will reduce direct labour ad variable costs by 20%. Supervision costs ($30,000 per year} and direct materials per unit will not be affected by the new equipment. The new equipment's capacity would be 80,000 units per year. The general overhead will be unaffected. Required a. Assume that 50,000 units are needed for the year. State which course of action would be a better idea? (Show calculations}