Muffintop Company makes two types of snack cake, the poppy seed and the blueberry. Basic production information follows:

Poppy seed Blueberry

Direct materials cost per unit $0.75 $0.85

Direct labor cost per unit $0.25 $0.25

Sales price per unit $2.50 $2.50

Expected production per month 140,000 units 190,000 units

Muffintop has monthly overhead of $135,000, which is divided into the following cost pools:

Setup costs $50,000

Quality control 28,300

Maintenance 37,800

Engineering 18,900

Total $135,000

The company has also compiled the following information about the chosen cost drivers:

Poppy seed Blueberry Total

Number of setups required 40 60 100

Number of inspections 75 350 425

Number of machine hours 1,500 750 2,250

Number of Engineering hours 65 70 135

Required:

a) Calculate Muffintops gross margin per unit for each product under the traditional costing system. The cost driver for the overhead in the traditional method is machine hours.

b) Calculate Muffintops gross margin per unit for each product under the activity based costing system.

c) Compare the gross margin of each product under the traditional system and ABC.

d) Explain the pros and cons of using activity based costing