Machine Costs 3,484,800 158.40 316,800 79.20 Total Direct $8,854,000 $407.00 $3,071,200 5767.80 Costs Manufacturing $4,840,000 $220.00 $440,000 $110.00 Overhead Costs Total Cost of $13,794,000 $627.00 $3,511,200 $877.80 Goods Sold Plum's controller, Steve Jacobs, is advocating the use of activity-based costing and activity-based management and has gathered the following information about the company's manufacturing overhead costs for the year ended November 30, 2017. Units of the Cost-Allocation Base Activity Center (Cost-Allocation Total Activity Mammoth Maximu Total Base) Costs m Soldering (number of solder points) $1,036,200 1,185,000 385,000 1,570,00 0 Shipments (number of shipments) 946,000 16,200 3,800 20,000 Quality control (number of 1,364,000 56,200 21,300 77,500 inspections) Purchase orders (number of orders) 1,045,440 80,100 109,980 190,080 Machine power (machine-hours) 63,360 176,000 16,000 192,000 Machine setups (number of setups) 325,000 16,000 14,000 30,000 Total manufacturing overhead $5,280,000 After completing his analysis, Jacobs shows the results to Charles Clark, the Plum division president. Clark does not like what he sees. "If you show headquarters this analysis, they are going to ask us to phase out the Maximum line, which we have just introduced. This whole costing stuff has been a major problem for us. First Mammoth was not profitable and now Maximum. "Looking at the ABC analysis, I see two problems. First, we do many more activities than the ones you have listed. If you had included all activities, maybe your conclusions would be different. Second, you used number of setups and number of inspections as allocation bases. The numbers would be different had you used setup-hours and inspection-hours instead. I know that measurement problems precluded you form using these other cost-allocation bases, but I believe you ought to make some adjustments to our current numbers to compensate for these issues. I know you can do better. We can't afford to phase out either product." Jacobs knows that his numbers are fairly accurate. As a quick check, he calculates the profitability of Maximum and Mammoth using more and different allocation bases. The set of activities and activity rates he had used results in numbers that closely approximate those based on more detailed analyses. He is confident that headquarters, knowing that Maximum was introduced only recently, will not ask Plum to phase it out. He is also aware that a sizable portion of Clark's bonus is based on division revenues. Phasing out either product would adversely affect his bonus. Still, he feels some pressure from Clark to do something. 1 Using activity-based costing, calculate to the gross margin per unit of the Maximum and Mammoth models. 2 Explain briefly why these numbers differ from the gross margin per unit of the Maximum and Mammoth models calculated using Plums' existing simple costing system. Comment on Clark's concerns about the accuracy and limitations of ABC. 1AW How might Plum find the ABC information helpful in managing its business? What should Steve Jacobs do in response to Clark's comments