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Mechanical City manufactures electronic testing and measurement instruments. Many products are custom-designed with recent orders for function generators, harmonic analyzers, logic analyzers, temperature measurement instruments, and data-logging instruments. The company prices its instruments at 30 percent over estimated cost (excluding administrative and selling costs). Recently, senior management has noted that its product mix has changed. Specifically, the company is receiving fewer large orders for instruments that are relatively simple to produce, and customers are saying that the company is not price competitive. The company is, however, receiving more small orders for complex instruments, and customers appear quite happy to pay Mechanical City's price. The situation was discussed at a weekly management meeting. Vinson Kompany, VPof operations, blamed the company's antiquated cost accounting system. "Look," he said, "if you have bad cost information, you're going to have bad prices, and we re still doing product costing the way companies did it in the 1930s. Ivebeen reading articles about activity-based costing, and they indicate that out-of-date costing systems make simple products look too costly and complex products too cheap. If that's true, it would explain why we're not price competitive for simple products. The meeting ended with a decision to hire a consultant to conduct a preliminary ABC study to determine how a switch to ABC would affect product cost. The consulting firm selected two recent orders for study: a 900-unit order for a temperature-monitoring device and an order for 1 harmonic analyzer The cost and prices charged were as follows: Exhibit 1: Temperature Harmonic Monitor Analyzer Component cost per unit Direct labor per unit Overhead per unit Cost per unit Markup at 30 rice per unit Number of units Value of order In the current system, overhead is applied based on an estimate of $40,000,000 of annual overhead and $10,000,000 of direct labor cost. The consultants have broken the