Problem 3 Perfect Harmony, Inc. Manufactures two products: IVOONY and IVOREE. The firm uses a single plant-wide overhead rate based on direct labor hours, (2 hours for every unit of lvoony and 3 hours for every unit of Ivoree). Production and product costing are as follows: Ivoony Ivoree Production capacity 1,000 units 5,000 units Direct materials P 40 per unit P 60 per unit Direct labor (not including set-up time) P15 per hour P 15 per hour Manufacturing overhead budget: Machine related cost P 450,000 Set-up and inspection 180,000 Engineering 90,000 Plant related costs 96,000 Total P 816,000 ========= Perfect Harmony, Inc. prices its products at 20% above cost. Recently however, the company has been challenged in the market for Ivoree by a Korean competitor, Kimboon Corp. a new entrant in this market. Kimboon has been selling Ivoree for P220 each. Perfect Harmony, Inc. president is puzzled by Kimboon's ability to sell Ivoree for such a low price. He asked you to look into the matter. You have decided that the company's traditional volume-based product costing system maybe causing cost distortions between the two products. Ivoree are high volume, relatively simple product. Ivoony on the other hand are quite complex and exhibit a much lower volume. As a result you have begun work on an activity-based costing system. The following cost drivers have been identified for the four activity cost pool: Budgeted level Activity cost pool Cost driver of cost driver Machine related cost Machine hours 9,000 hours Set-up and inspection Number of production runs 40 runs Engineering Engineering change orders 100 change orders Plant related costs Square footage of space 1,920 sq. Ft. Additional information were gathered: * Each unit of Ivoony requires 4 machine hours, whereas each Ivoree requires 1 machine hour Ivoony are manufactured in product runs of 50 units each, Ivoree are manufactured in 250-unit batches. Three-quarters of the engineering activity as measured in terms of change orders is related to Ivoony * The plant has 1,920 square feet of space. 80 percent of which is used in production of Ivoony Required: (Answers in two decimal places) a. Using the present traditional system, compute for the cost per unit of Ivoony and Ivoree. Also calculate the selling price of each product. (round off to P1.00) b. Using the activity based costing, compute for the factory overhead cost per unit of lvoony and Ivoree. Show the computation of activity cost rate and its allocation to each product. c. Using activity based costing, compute for the product cost per unit of Ivoony and Ivoree. d. Calculate the selling price of each product (Ivoony and Ivoree) using both the present traditional cost system and activity-based costing