Part 1: Compute overhead and gross margin using traditional costing Per unit Selling price Part 271 31.86 Part 342 24 Product cost Prime costs 9.53 8.26 Overhead 12.83 5.77 Total product cost 22.36 14.03 Total profit 9.5 10 Part 2: Select the best cost driver and compute overhead rates for each cost pool Cost pool Setup costs Cost Driver Number of production runs Overhead rate 800 Material handling costs Machine costs Receiving costs Material moves Machine hours 1000 9.46 Receiving order 1500 Engineering costs Engineering hours 150 General plant costs Direct labor hours 1.83 Part 3: Compute the overhead and gross margin using Activity-based costing Per unit Part 271 31.86 Part 342 24 Selling price Product cost Prime costs 9.53 8.26 Overhead 7.14 34.2 Total product cost 16.7 42.45 Total profit 15.2 -18.4 Cost pool Overhead rate Cost Driver Part 271 Setup costs 800 100 80000 Material handling costs 1000 500 500000 Machine costs 9.46 125000 1182432 Receiving costs 1500 400 600000 Engineering costs 150 5000 750000 General plant coss 1.83 250000 458716 Total overhead cost 3571148 Production 500000 Overhead cost per unit 7.1 Cost pool Setup costs Overhead rate Cost Driver Part 342 800 200 160000 Material handling costs 1000 400 400000 Machine costs 9.46 60000 567600 Receiving costs 1500 1000 1500000 Engineering costs 150 5000 750000 General plant coss 1.83 22500 41175 Total overhead cost 3418775 Production Overhead cost per unit 100000 34.2 Part 4: Recommendations - Management wants to see what the result is by increasing the price for product 342 by 25% Per unit Selling price Part 271 31.86 = + Part 342 30 Product cost Prime costs 9.53 8.26 Overhead 7.14 34.2 Total production cost 16.7 42.45 Total profit 15.2 -12.4 Part 5: Recommendations - Materials have been sourced that will reduce prime costs by $1.50 for each part. It is also decide to reduce the price for product 271 by 25% Per unit Selling price Part 271 23.895 Part 342 30 Product cost Prime costs 8.03 6.76 Overhead 7.14 34.2 Total product cost 15.2 40.95 Total profit 8.7 -10.9