HRIP Company produces wallets from leather, fabric, and synthetic materials in a single production department. The basic product is a standard wallet made from leather and lined with fabric. HRIP has a good reputation in the market because the standard wallet is a high-quality item that has been produced for many years. Last year, the company decided to expand its product line and produce specialty wallets for special orders. These wallets differ from the standard in that they vary in size, contain both leather and synthetic materials, and are imprinted with the buyer's logo (the standard wallet is simply imprinted with the HRIP name in small letters). The decision to use some synthetic materials in the wallet was made to hold down the materials cost. To reduce the labor costs per unit, most of the cutting and stitching on the specialty wallets is done by automated machines, which are used to a much lesser degree in the production of the standard wallets. Because of these changes in the design and production of the specialty wallets, HRIP management believed that they would cost less to produce than the standard wallets. However, because they are specialty items, they were priced slightly higher; standards are priced at $30 and specialty wallets at $32.After reviewing last month's results of operations, HRIP's president became concerned about the profitability of the two product lines because the standard wallet showed a loss while the specialty wallet showed a greater profit margin than expected. The president is wondering whether the company should drop the standard wallet and focus entirely on specialty items. Units and cost data for last month's operations as reported to the president are as follows: Standard Specialty Units produced 10,000 2,500 Direct materials Leather (1 sq. yd. $16.00; 1/2 sq. yd. $16.00) $ 16.00 $ 8.00 Fabric (1 sq. yd. $4.00; 1 sq. yd. $4.00) 4.00 4.00 Synthetic 5.00 Total materials 20.00 17.00 Direct labor (1/2 hr. $13.00, 1/4 hr. $13.00) 6.50 3.25 Manafacturing overhead (1/2 hr. 8.98; 1/4 hr. 8.98) 4.49 2.25 Cost per unit $ 30.99 $ 22.50 Factory overhead is applied on the basis of direct labor hours. The rate of $8.98 per direct labor hour was calculated by dividing the total overhead ($50,500) by the direct labor hours (5,625). As shown in the table, the cost of a standard wallet is $0.99 higher than its $30 sales price; the specialty wallet has a cost of only $22.50, for a gross profit per unit of $9.50. The problem with these costs is that they do not accurately reflect the activities involved in manufacturing each product. Determining the costs using ABC should provide better product costing data to help gauge the actual profitability of each product line. The manufacturing overhead costs must be analyzed to determine the activities driving the costs. Assume that the following costs and cost drivers have been identified: The Purchasing Department's cost is $7,000. The major activity driving these costs is the number of purchase orders processed. During the month, the Purchasing Department prepared the following number of purchase orders for the materials indicated: Leather 20 Fabric 30 Synthetic material 50 The cost of receiving and inspecting materials is $6,500. These costs are driven by the number of deliveries. During the month, the following number of deliveries were made: Leather 30 Fabric 40 Synthetic material 80 Production line setup cost is $11,000. Setup activities involve changing the machines to produce the different types of wallets. Each setup for production of the standard wallets requires one hour; each setup for specialty wallets requires two hours. Standard wallets are produced in batches of 200, and specialty wallets are produced in batches of 25. During the last month, there were 50 setups for the standard item and 100 setups for the specialty item. The cost of inspecting finished goods is $8,000. All wallets are inspected to ensure that quality standards are met. However, the final inspection of standard wallets takes very little time because the employees identify and correct quality problems as they do the hand cutting and stitching. A survey of the personnel responsible for inspecting the final products showed that 150 hours were spent on standard wallets and 250 hours on specialty wallets during the month. Equipment-related costs are $6,000. Equipment-related costs include repairs, depreciation, and utilities. Management has determined that a logical basis for assigning these costs to products is machine hours. A standard wallet requires 1/2 hour of machine time, and a specialty wallet requires 2 hours. Thus, during the last month, 5,000 hours of machine time relate to the standard line and 5,000 hours relate to the specialty line. Plant-related costs are $12,000. These costs include property taxes, insurance, administration, and others. For the purpose of determining average unit costs, they are to be assigned to products using machine hours.

a. Using activity-based costing concepts, what overhead costs should be assigned to the two products?

b. What is the unit cost of each product using activity-based costing concepts?

c. Reevaluate the president's concern about the profitability of the two product lines.

d. Discuss the merits of activity-based management as it relates to HRIP's ABC cost system