Ralston Company has four product lines. The Machining product line produces specialized equipment for Oil and Gas exploration companies. Currently, overhead costs are allocated based a traditional, plant-wide overhead rate. The rate was based on $1,050,000 total budgeted overhead and 25,000 machine hours budgeted for the year. Ralstons CFO has heard about ABC, and would like to see if it makes any difference in the costs allocated to jobs in the product line.

The accounting staff has provided the following information about budgeted manufacturing overhead and activity if they were to implement activity-based costing.

OH Cost Pool Amount Cost Driver Estimated Driver

Setup $350,000 Number of setups 1,500 stetups

Inspection $500,000 Number of inspections 12,500 inspections

Equipment $200,000 Number of machine hours 25,000 machine hours

To compare the impact of the choice of allocation methods (traditional plant-wide rate vs. ABC) the CFO decided to evaluate one representative job. Job CRT5050 required 18 setups, 85 machine hours, and 60 inspections. Direct materials and direct labor combined for this job were $8,000. Using the current traditional cost system, Ralston quoted a price of $18,000 for Job CRT5050.

1.Based on the current cost accounting system, determine the gross profit expected from Job CRT5050?

2.Using ABC, determine the gross profit expected from Job CRT5050?

3. Briefly explain why the two methods yield such different gross profit estimates.

4.Assume that Ralston implemented activity-based costing; determine the price that should have been quoted in order for the firm to achieve a target gross profit percentage of 30%.