Sandra Saldana, senior vice president for sales for Showman Shoes,Inc., noticed that the company had substantially increased its market share for the high-quality boomer boots (BB) and lost market share for the lower-quality lazy loafers (LL). Sandra found that Showman's prices were lower than the competitors' for BB but higher for LL. She did not understand the reasons for these price differences because all companies used the same production technology and were equally efficient.

The manufacturing process is relatively simple. Showman's manufacturing facility has a cutting department and an assembly department. The high-quality BB is produced in small batches (1,000 pairs of shoes each), and the lower-quality LL is produced in large batches (3,000 pairs each). Sandra has asked you, the company's new controller, to analyze the product costing method to see if the product prices should be changed.

The company currently uses a plant-wide overhead rate based on direct labor hours. The rate is computed at the beginning of the year using the following budgeted data:

Total manufacturing overhead	$1,200,000
Total direct labor hours	49,000
Total machine hours	49,400
Total setup hours	520

Your assistant has provided you with the following additional information about the production of batches of BB and LL:

For each batch of BB (1,000 pairs):	Cutting	Assembly	Total
Direct labor hours	80	120	200
Machine hours	160	120	280
Setup hours	3	1	4
Direct costs	$7,500	$6,000	$13,500
For each batch of LL (3,000 pairs):
Direct labor hours	150	180	330
Machine hours	150	120	270
Setup hours	1	1	2
Direct costs	$9,000	$7,200	$16,200

On further inquiry, your assistant has collected the following information on activities and their cost drivers:

Activities	Cost	Activity Category	Cost Driver
Maintenance	$160,000	Product sustaining	Machine hours
Setups	400,000	Batch related	Setup hours
Cutting supervision	280,000	Batch related	Setup hours
Cutting depreciation	160,000	Facility sustaining	Machine hours
Assembly supervision	160,000	Unit related	Direct lab. hrs.
Assembly depreciation	40,000	Facility sustaining	Machine hours
	$1,200,000

Questions:

1. Using a single, plant-wide overhead rate based on direct labor hours, determine the costs per pair of BB and LL.

2. Determine the costs per pair of BB and LL using activity-based costing.

3. Does Showman Shoes, Inc. have a problem with product cross-subsidization? Explain.

4. What is your recommendation regarding the appropriate product costing system for

Showman Shoes? Additionally, what new decisions might Showman Shoes make as a result of their new costing system?