Peach Bags (PB) is a designer of high-quality backpacks and purses. Each design is made in small batches. Each spring, PB comes out with new designs for the backpack and for the purse. The company uses these designs for a year and then moves on to the next trend. The bags are all made on the same fabrication equipment that is expected to operate at capacity. The equipment must be switched over to a new design and set up to prepare for the production of each new batch of products. When completed, each batch of products is immediately shipped to a wholesaler. Shipping costs vary with the number of shipments. Budgeted information for the year is as follows:

Peach Bags
Budget for Costs and Activities
For the Year Ended February 28, 2014
Direct materialspurses			$323,200
Direct materialsbackpacks			456,000
Direct manufacturing laborpurses			102,400
Direct manufacturing laborbackpacks			99,000
Setup			17,000
Shipping			73,000
Design			166,000
Plant utilities and administration			212,000
Total			$1,448,600
Other budget information follows:
	Backpacks	Purses	Total
Number of bags	6,000	3,200	9,200
Hours of production	1,500	2,500	4,000
Number of batches	120	80	200
Number of designs	2	2	4

1.

Identify the cost hierarchy level for each cost category.

2.

Identify the most appropriate cost driver for each cost category. Explain briefly your choice of cost driver.

3.

Calculate the budgeted cost per unit of cost driver for each cost category.

4.

Calculate the budgeted total costs and cost per unit for each product line.

5.

Explain how you could use the information in requirement 4 to reduce costs.