The Big Bus Company manufactures two products, Product 1 and Product 2. Product 2 was developed as an attempt to enter a market closely related to that of Product 1. Product 2 is the more complex of the two products, requiring three hours of direct labour time per unit to manufacture compared to one and one-half hours of direct labour time for Product 1. Product 2 is produced on an automated production line.

Overhead is currently assigned to the products on the basis of direct labour-hours. The company estimated it would incur a total of $396,000 in manufacturing overhead costs and produce 5,500 units of Product 2 and 22,000 units of Product 1 during the current year. Unit costs for materials and direct labour are:

Product 1 Product 2 Direct Labour $7 $15 Direct material $9 $20

Required:

a. Compute the predetermined overhead rate under the current method of allocation and determine the unit product cost of each product for the current year.

b. The company's overhead costs can be attributed to four major activities.

These activities and the amount of overhead cost attributable to each for the current year are given below:

Expected Activity Activity Costs Pools Estimated Overhead Costs Product 1 Product 2 Total Machine set-ups required $170,000 700 1,000 1,700 Purchase orders issued 37,000 300 200 500 Machine-hours required 91,000 4,000 9,000 13,000 Maintenance requests issued 98,000 400 600 1,000 $396,000

Using the data above and an activity-based costing approach, determine the unit product cost of each product for the current year.