The Redwood City plant of Crimson Components Company makes 2 types of rotators, R361 ad R572, for automobile engines. The old cost accounting system at the plant traced overhead costs to 4 cost pools:

Cost Pool	Overhead	Allocation Base
S1 Set-ups	$1,176,000	Direct labour cost
S2 Maintenance	1,120,000	Machine Hours
P1 Casting	480,000	-
P2 Machining	780,000	-
	$3,556,000

Pool S1 included service activity costs related to setups, production scheduling, plant administration, janitorial services, materials handling, and shipping. Pool S2 included overhead costs related to machine maintenance and repair, rent, insurance, power, and utilities. Pools P1 (Casting) and P2 (Machining) included supervisors wages, idle time, and indirect materials for the 2 production departments, casting and machining, respectively.

The old accounting system allocated overhead costs in Pools S1 and S2 to the 2 production departments using the direct labour costand machine hours, respectively, as the bases. Then the accumulated overhead costs in pools P1 and P2 were applied to the products on the basis of direct labour hours. A separate rate was determined for each of the 2 production departments. The direct labour wage rate is $15 per hour in casting and $18 per hour in machining.

	Direct Labour Hours (DLH) and Cost ($)
Department	R361	R572	Total	Direct Labour Cost
Casting (P1)	60,000	20,000	80,000	$1,200,000
Machining (P2)	72,000	48,000	120,000	$2,160,000
	132,000	68,000	200,000	$3,360,000
	Machine Hours (MH)
Department	R361	R572	Total
Casting (P1)	30,000	10,000	40,000
Machining (P2)	72,000	48,000	120,000
	102,000	58,000	160,000
	R361	R572
Sales price per unit	$19	$20
Sales units	500,000	400,000
Number of orders	1,000	1,000
Number of setups	2,000	4,000
Materials cost per unit	$8	$10

Now the plant has implemented an activity-based costing system. The following table presents the amounts from the old cost pools that are traced to each of the new activity cost pools.

Activity Cost Drivers			Old Cost Pools
	S1	S2	P1	P2	Total
P1 - DLH	$120,000	-	$120,000	-	$ 240,000
P2 - DLH	$240,000	-	-	$120,000	360,000
Setup Hours	$816,000	$80,000	$240,000	540,000	1,676,000
P1 - MH	-	$260,000	$120,000	-	380,000
P2 - MH	-	$780,000	-	120,000	900,000
	$1,176,000	$1,120,000	$480,000	$780,000	$3,556,000

Setups for R572 are 50% more complex than those for R361, that is, each R572 setup takes 1.5 times as long as one R361 setup.

Required:

a.Determine the product costs (per unit) using the old system. Show all intermediate steps for both Stage 1 and Stage 2 allocations, including departmental overhead rates and a breakdown of product costs into each of their components.

b.Determine the product costs (per unit) using the new system.

c.Explain the intuitive reason that the product costs differ under the 2 accounting systems.

d.What should Crimson Components do to improve the profitability of its Redwood City plant?

e.Describe how experienced production and sales managers are likely to react to the new product costs.