Nagoya is a small backpack manufacturer specializing in smart and functional backpacks. Recently, it has expanded its line of backpacks to include high-quality, lightweight hiker backpacks. This new model uses a more expensive material and takes longer to produce. While a basic school backpack can be cut and sewn together in 30 minutes, a hiker backpack takes 45 minutes to cut and sew together. The school model is produced in batches of 1,000 packs, while the hiker model is produced in batches of 100 packs. Each batch, whether being school backpacks or hiker backpacks, requires an inspection time of 1 hour. If direct labor hours are used to allocate manufacturing overhead costs, product profitability can be calculated as follows:

	School Backpacks	Hiker Backpacks
Selling Price	10	30
Less:
Direct Materials	2	10
Direct Labor	2	3
Manufacturing Overhead	3	4.5
Gross Margin	3	12.5
Selling/Administrative Expenses	0.5	1
Profit	2.5	11.5
Sales Volume	90,000	6,000

Angela Suzuki, the CFO at Nagoya, believes that activity-based costing may be a more accurate way of measuring the costs of the two models. She has traced manufacturing overheads to the following activity pools:

			Number of cost drivers used
Activity	Activity Costs	Activity Driver	School Backpacks	Hiker Backpacks
Cutting and Sewing	19,800	Direct labor hours	45,000	4,500
Orders	97,500	Number of orders	450	200
Inspections	179,700	Number of inspections	(a)	(b)
Total	297,000

Requirements:

1. Using activity-based costing, calculate the manufacturing overhead cost per unit for each type of backpack. Calculating the missing numbers, (a) and (b) in the table, is required.

2. Calculate product profitability using activity-based costs.

3. The sales manager thinks that activity-based costing is not necessary because the method of assigning costs to individual products does not affect the total manufacturing overhead costs. Use your analyses in (1) and (2) to explain why Angela should care about how manufacturing overhead costs are assigned to individual products and how she may use the activity-based costing information to enhance the companys profitability.