Since its inception, Monterey Corporation has produced a single product, Product A24. The company added the technological capability to begin producing a second product, Product D36. Because of the success of Product D36, manufacturing has been shifting toward its production. Sales of Product D36 are now 50 percent of the total annual sales of 20,000 units, and the company is optimistic about the new products future sales growth. Management is thrilled with the new products initial success but concerned about the companys declining profits since the products introduction. Suspecting a problem with the companys costing system, management hires you to investigate.

In reviewing the companys records, product specifications, and manufacturing processes, you discover the following information.

The company is in an extremely competitive industry in which markups are low and accurate estimates of cost are critical to success.

The company presently allocates overhead costs to its products based on direct labor hours.

Product D36 has complex parts that require more labor, machine time, setups, and inspections than Product A24.

Total Overhead Costs are $2,016,000.

Budgeted costs per unit for direct materials and labor are as follows:

Direct Cost per Unit	Product A24	Product D36
Direct materials	$48	$48
Direct labor	$30/hour X 2 hours production time	$30/hour X 2.8 hours production time

After carefully studying the companys overhead, you identify four different categories of overhead costs. Using your knowledge of this company and similar companies in the same industry, you estimate the total costs for each of these categories and identify the most appropriate cost driver for measuring each products overhead consumption. Detailed information for each overhead cost category follows.

Overhead Category	Estimated Cost	Cost Driver	Use of Cost Driver
Machining	$1,080,000	Number of machine hours	A24: 20,000 hours; D36: 80,000 hours
Set-ups	456,000	Number of machine setups	A24: 1,500 setups; D36: 3,500 setups
Inspections	360,000	Number of inspections	A24: 200 inspections; D36: 400 inspections
Other Factory Overhead	$120,000	Equal percentage for each product	A24: 50%; D36: 50%
Total Overhead	$2,016,000

1. Determine the total cost per unit for each product when overhead is assigned using the companys current overhead allocation method based on direct labor hours

A24 D36

2.Determine the total cost per unit for each product if the company switched to activity-based costing. [12 points] A24 D36