Scalar Manufacturing produces automobile parts in batches in one continuous manufacturing process. The company uses direct labour hours to assign overhead to each part. Magda Malakova, the financial controller, is wondering what the reasons are for the low profits in 2020 and why the gear product line did not attain Scalar's 20% net profit margin target (net profit per unit on sale price). She has calculated the 2020 net profit per unit as follows:

Magda intends to implement activity-based costing at Scalar. Each part requires engineering design activity. Once the design is completed, the equipment can be set up for batch production. Once the batch is completed, a sample is taken and inspected to see if the parts are within the tolerances allowed. The manufacturing process has five activities: engineering, set-ups, machining, inspection, and processing. Overhead has been assigned to each activity using direct attribution and resource drivers:

Engineering	$ 80,000
Set-ups	45,000
Machining	120,000
Inspection	60,000
Processing	35,000
Total overhead	$340,000

Magda has identified activity drivers for each activity and listed their practical capacities:

Engineering Hours	Number of Set-ups	Machine Hours	Number of Inspections	Direct Labour Hours
4,000	250	20,000	1,500	7,000

Following are the production data in 2020 for brake disks and gears:

Instructions

a.

Using the activity-based approach, calculate the activity rates, the net profit per unit, and the net profit margin percentage for both the brake disk and the gear.

a. Percentage of profit margin, brake disk 12.57%

b.

Explain why the new profit margin percentages for the brake disk and the gear are different from what they were originally.