Jake Inc manufactures two products: A and B. The annual production and sales of Product A is 500 units and of Product B is 1,000 units. The company currently uses Direct Labor Hours as the basis for applying all Manufacturing Overhead to products. Product A requires 0.4 Direct Labor Hours per unit and Product B requires 0.2 Direct Labor Hours per unit (direct labor is $20 per hour). Also, direct materials is $5 for Product A and $10 for Product B. The total estimated overhead for next period is $68,756. Jake Inc is in an extremely competitive industry and has been struggling, financially, even while experiencing strong demand for its products. Jake uses a 20% markup on cost to price its products. Jake is considering switching to an Activity-Based Costing system. The new Activity-Based Costing system would have three overhead activity cost pools--Activity 1, Activity 2, and General Factory--with estimated overhead costs and expected activity as follows:

(Note: The General Factory activity cost pool's costs are allocated on the basis of Direct Labor Hours.)

Estimated

Overhead Expected Activity

Activity Cost Pool Costs Product A Product B Total

Activity 1 ................ $31,031 1,000 300 1,300

Activity 2 ................ $22,249 1,600 300 1,900

General Factory....... $15,476 200 200 400

Total ........................ $68,756

The Company has hired a consultant, you, to explain the financial struggles.