Princeton Company manufactures ONLY two products: L1 and L2. The company expects to produce and sell 1,000 units of Product L1 and 1,000 units of Product L2 during the current year. The company used to allocate overhead costs to products on the basis of direct labor hours. Recently, the company implemented activity-based costing to compute unit product costs. Data on total estimated costs relating to the companys production department are given below for the current year:

Activity Center Estimated Expected Activity

(Cost Driver) OH costs Product L1 Product L2

Machine setups (setups) $ 30,000 100 200

Purchase orders (orders) 60,000 1,000 2,000

General factory (MH) 60,000 2,000 4,000

$150,000

Product L1 Product L2

Total Direct Material Cost $35,000 $60,000

Total Direct Labor Cost 20,000 40,000

Direct Labor Hours per unit 1 2

Tasks:

a. If the company had used the old method of overhead allocation, what would be the unit cost for each product?

b. Using the activity-based costing approach, determine the cost per unit for each product

c. The companys controller is puzzled by the results in parts a and b. Can you offer an explanation? Support your arguments with numbers. Is ABC useful for this company?