Lennox Industries manufactures two products: A and B.A review of the company's accounting records revealed the following per-unit costs and production volumes for the year:

AB

Production volume (units)2,5005,000

Direct material$ 40$60

Direct labor:

2 hours at $1224

3 hours at $1236

Manufacturing overhead:

2 hours at $93186

3 hours at $93279

The total overhead cost for the year was 1,860,000. Currently, the company uses a single, plant-wide rate based on direct labor hours to allocate overhead.

Management is considering a shift to activity-based costing in an effort to improve the firm's accounting procedures, and the following data are available:

Cost Driver Volume

Cost Pool

Cost

Cost Driver

A

B

Total

Setups

$240,000

Number of setups

100

20

120

General factory

1,500,000

Direct labor hours

5,000

15,000

20,000

Machine processing

120,000

Machine hours

2,200

800

3,000

$1,860,000

Lennox determines selling prices by adding 40% to a product's total cost.

Required:

a.Compute the per-unit cost and selling price of each product using Lennox's current costing procedures.

b.Compute the total per-unit cost and selling price for each product under activity-based costing.

c.Lennox has recently encountered significant international competition for product B, with considerable business being lost to very aggressive suppliers.Will activity-based costing allow the company to be more competitive with product B from a price perspective?Briefly explain

d.Explain the reason for changes in unit product costs when the overhead allocation was changed from traditional plant-wide overhead allocation to activity-based costing overhead allocation.

e.List two steps you would take to further improve the accuracy of overhead allocation as well as the accuracy of product costing.