Product Costing: Company-wide Overhead Versus ABC LaMesa produces machine parts as a contract provider for a large manufacturing company. LaMesa produces two particular parts, shafts and gears. The competition is keen among contract producers, and LaMesa's top management realizes how vulnerable its market is to cost-cutting competitors. Hence, having a very accurate understanding of costs is important to LaMesa's survival. LaMesa's president, Jose Rodriguez, has observed that the company's current cost to produce shafts is $21.35, and the current cost to produce gears is $12.36. He indicated to the controller that he suspects some problems with the cost system because LaMesa is suddenly experiencing extraordinary competition on shafts, but it seems to have a virtual corner on the gears market. He is even considering dropping the shaft line and converting the company to a one-product manufacturer of gears. He asked the controller, Felix Bernhardt, to conduct a thorough cost study and to consider whether changes in the cost system are necessary. The controller collected the following data about the company's costs and various manufacturing activities for the most recent month:

Product Costing: Company-wide Overhead Versus ABC LaMesa produces machine parts as a contract provider for a large manufacturing company. LaMesa produces two particular parts, shafts and gears. The competition is keen among contract producers, and LaMesa's top management realizes how vulnerable its market is to cost cutting competitors. Hence, having a very accurate understanding of costs is important to LaMea's survival LaMesa's president, Jose Rodriguez, has observed that the company's current cost to produce shafts is $21.35, and the current cost to produce gears is $12.36. He indicated to the controller that he suspects some problems with the cost system because LaMesa is suddenly experiencing extraordinary competition on shafts, but it seems to have a virtual corner on the gears market. He is even considering dropping the shaft line and converting the company to a one-product manufacturer of gears. He asked the controller, Felix Bernhardt, to conduct a thorough cost study and to consider whether changes in the cost system are necessary. The controller collected the following data about the company's costs and various manufacturing activities for the most recent month Production units Selling price Overhead per unit (based on direct labor hours) Materials and direct labor cost per unit Number of production runs Number of purchasing and receiving orders processed Number of machine hours Number of direct labor hours Number of engineering hours Number of material moves Shafts Gears 50,000 10,500 $31.86 $24.00 12.82 $6.10 $8.53 $6.26 20 40 100 12,750 6,000 25,000 2,500 5,000 5,000 40 50