The board of directors of Mercury Manufacturing Company recently approved the companys budget and production plan for its coming fiscal year (FY). The company manufactures two products door latches and door hinges from a single plant that comprises four activities machine setup, fabrication, assembly, and plant administration. The company uses the same resources (including machinery and equipment, supervision and administrative services) to manufacture both products. Management uses the traditional approach to allocate manufacturing overhead (MOH) costs, based on direct labor hours (DLH) incurred in its two production departments, to determine the unit cost of each product. The companys budget includes the following MOH allocation and related computations:

Per unit:	Door latches		Door hinges
Selling price (SP)	$24.75		$11.98
Product costs:
Direct material (DM)	$ 7.20		$ 2.90
Direct labor (DL)	7.50		5.00
MOH (A) x (B)	3.87		2.58
Total	$18.57		$10.48
Gross profit (GP)	$ 6.18		$ 1.50
Gross margin (GM) GM = GP / SP (see Note 1 below)	25.0%		12.5%
Budgeted total units of production for fiscal year (FY)	50,000		150,000
Budgeted batch size (units per batch)	200		1,000
(A) Direct labor hours (DLH) per unit	0.30		0.20
(B) MOH cost per direct labor hour (DLH)	(C)	$12.90	(C)	$12.90
(C) Budgeted FY total MOH cost, $580,000 / Budgeted FY total DLHs, 45,000
Note 1 Management set the selling prices for its products to achieve gross margins of 25 percent on latches and 12.5 percent on hinges, based on its analysis of competitors prices and the targeted return on equity capital set by the companys board.

Management is considering adopting the Activity-based Costing (ABC) method to determine its product unit costs.

Using the information included in the table below (taken from the companys budget and production plan) complete the table according to the ABC method to compute the per-unit MOH cost, total cost, gross profit, and gross margin of each product.

Describe briefly the apparent effect that managers use of the traditional MOH allocation method has had on its pricing decisions, compared to using the ABC method.

The budget and production plan reflect normal levels of production resource availability and capacity utilization (i.e., activity resource consumption) for the company.

a.
Activity	Budgeted MOH cost (Note A)	Activity cost driver (Driver type)	Budgeted level or volume of cost driver	MOH driver rate (dollars)	Consumption of cost driver
					Door latches		Door hinges
					Hours	Cost	Hours	Cost
Service depts.:
Machine setup	$130,000	Setup hrs (Batch)	1,300	$	4.0	$	2.0	$
Plant admin.	225,000	DLH in both prod. depts. (Unit)		$	0.30	$	0.20	$
Production depts.:
Fabrication	125,000	Machine hrs (Unit)	12,500	$	0.10	$	0.05	$
Assembly	100,000	DLH (Unit)	25,000	$	0.20	$	0.10	$
Total	$580,000
MOH costs:
Total batch-related (above)						$		$
Divide: Budgeted batch size (units)
Batch-related costs per unit						$		$
Total unit-related costs (above)						$		$
Total MOH cost per unit						$		$
Selling price (SP)						$		$
Product costs:
Direct material (DM)						$		$
Direct labor (DL)						$		$
MOH (from above)						$		$
Total						$		$
Gross profit (GP)						$		$
Gross margin (GM)						%		%
Note A: MOH costs include:
Machine setup: Indirect labor of setup employees and supervision
Plant administration: Indirect labor of plant manager; human resources and accounting employees; office equipment and supplies, telecommunications, and contract payroll services
Fabrication: Primarily, costs of machinery and equipment (depreciation, rent, refurbishments, property taxes, and insurance)
Assembly: Primarily, indirect supervisory labor of Assembly department production employees

b. (Limit the length of your response to 100 words)

Replace this text with your response.