The Track corporation makes mountain bikes. They make several different models. Under the old cost system Track allocated overhead based on number of units produced. Overall, Track produces 150,000 bicycles each year. Track decided to switch to Activity Based Costing as it was consistently selling its basic model for 800, which is less than any competitor was offering a similar model. The following data relates to the basic model:

Basic Model:

Annual Production40,000 units

Direct Materials $400 per unit

Direct Labor$100 per unit

Firm-wide Manufacturing Overhead Cost Pools:

Cost Pool Cost Cost Driver

Material Ordering $400,000 Number of purchase orders

Machine Setup $6,000,000. Number of setups

Machine Processing. $14,000,000. Machine hours

Rent & other fixed costs. $5,000,000. Direct labor costs

Total overhead. $25,400,000

Annual Activity

Cost Pool All Products Basic model

Material Ordering 40,000 purchase orders. 8,000

Machine Setup 6,000 setups 1,000

Machine Processing 50,000Mhr 15,000Mhr

Rent & other fixed costs. $5,000,000 DL cost (firm-wide cost) ?

Required:

a.Calculate the unit cost per basic model under the old cost system.

b.Calculate the unit cost per basic model under the new ABC costing system. Should Track sell their basic model for $800?