South of the Borders frozen food division will be changing its product line to include two product offerings, a bean and cheese empanada, and a shredded beef and cheese empanada. The empanadas are formed through a molding operation in which a flour tortilla is inserted into a heated mold, one of the two pre-made purchased fillings is inserted through a small hole in the mold into the shell of the tortilla, item is deep fried, cooled to room temperature, and then the finished product is removed from the mold, and packaged for frozen storage and bulk palletized shipment.

Below is information regarding the direct costs and volumes of the two major products:

Variable Cost and Volume Data	Bean & Cheese	Shredded Beef
Raw materials	$0.40	$0.75
Direct Labor	$0.30	$0.45
Selling and General	$0.05	$0.05
Volume in units	300,000	200,000

Sales prices of the two products are $1.95 for the bean and cheese empanada and $2.99 for the shredded beef empanada. The number of hours required to manufacture each unit was the same for both products.

After interviewing the Factory and Production personnel, the division controller, Karen Solomon, prepared the following data table. From its simple cost structure, the company decided to reconsider its overhead pool and reallocate based on activity-based costing. Its simple overhead pool has been reclassified according to the ABC hierarchy within the following table:

ABC Cost Pools	Indirect Mfg Labor	Factory Insurance & Utilities	Depreciation Machinery & Factory	Repairs & Maintenance Factory	Selling, Marketing, & Distribution Expenses	General & Admin. Expenses
Product development	$ 5,700
Setup shell molding equip.	$ 3,000		$ 11,900
Setup filling equipment	$ 4,250		$ 7,500
Setup frying equipment	$ 1,200		$ 1,200
Equipment operations	$ 10,000	$ 28,100	$ 18,600	$ 10,000
Shipment preparation					$ 14,000
Distribution				$ 5,100
Administration					$ 11,000	$ 60,000
Totals	$ 24,150	$ 28,100	$ 39,200	$ 15,100	$ 25,000	$ 60,000

Solomon also noted the following percentage allocations of cost for the activities that are required to manufacture each product.

ABC Cost Allocation Percentages	Bean and Cheese	Shredded Beef
Product development	20%	80%
Setup shell molding equipment	60%	40%
Setup filling equipment	50%	50%
Setup frying equipment	50%	50%
Equipment operations	75%	25%
Shipment preparation	70%	30%
Distribution	65%	35%
Administration	50%	50%

1. Compute the cost of each product under the simple/traditional costing method. For period costs, use the same basis of allocation as factory overhead.
2. Compute the net operating profit margin of each product using the simple/traditional costing method.
3. Categorize the production activities under activity-based costing according to the cost hierarchy. Indicate the type of cost category, which aligns with the activity.
4. Compute the total overhead and period cost allocation under ABC assumptions for each product.
5. Compute the per unit ABC cost of each product.
6. Compute the net profit margin of each product using the ABC costing method.
7. Compare the net profit margin of the products under the simple/traditional cost assignment and the ABC assignment for each product. Evaluate the difference.
8. On a separate Excel workbook tab, write a brief explanation (approximately 2 paragraphs) that Solomon might deliver to management to justify the use of ABC for these two products.