Indirect costs were estimated as follows:

Expense	Amount
Indirect labor	20,000
Fringe benefits	16,000
Computer systems	10,000
Machinery	8,000
Maintenance	4,000
Energy	2,000
Total	60,000

Fringe benefits were 40% of direct and indirect labor.

Sales and production information for the four product lines is as follows:

	Blue	Black	Red	Purple
Production sales volume	50,000	40,000	9,000	1,000
Unit selling price	$1.50	$1.50	$1.55	$1.65
Material cost per unit	$0.50	$0.50	$0.52	$0.55
Direct labor per unit (hrs)	.02	.02	.02	.02
Machine hours per unit	.1	.1	.1	.1
Production runs	50	50	38	12
Setup time per run (hrs)	4	1	6	4

Case Requirements

1. Calculate a plant-wide predetermined overhead allocation rate based on direct labor cost and apply overhead to the four product lines. Calculate total product costs for the four lines using the plant-wide allocation rate and show the gross profit rate and unit cost for each.

2. What assumptions are implicit in this companys method of allocating overhead costs to the product lines? Do you believe these assumptions are supported by the operational procedures described in this case? Discuss.

3. Identify the main activities performed in the production process. Perform a first stage cost allocation and calculate allocation rates for each activity. Comment on your results with respect to the current allocation method. Do you believe that the costs as currently calculated are accurate? Why or why not?

4. Determine the estimated cost of each product line using activity-based-costing and the gross profit rate for each. What can you conclude about the cost accuracy of the two methods? Were costs distorted using a single allocation rate method?

5. As a result of the new cost information calculated, what actions can management take to make this company more profitable? Be explicit.