Use the information in provided in Exhibit 2 to calculate the revised product costs mentioned by Mary Ford shown below:

Exhibit 2:

Mary Ford: The last time we discussed this, Herb, showed you revised standard unit costs based on a more modern view of the proper way to allocate costs. I put the revisions together to better allocate overhead based on activities. First, I identified material related overhead (the cost of receiving and handling material), and allocated that to each product line based on the cost of material. The justification for this change is that material handling does not have any relationship to the labor cost of machining Secnd, I took set-up labor out of the total overhead and assigned it directly to each product line. This is a small amount, but the cost of set ups also has no relationship whatever to the total labor cost of a production run. Finally, I substituted machine hours for labor dollars as the basis for allocating the remaining factory overhead. It seems to me that machine hours better reflect the use of our most expensive resource (machines) and should be used to assign overhead costs to the products. The results of this revision made sense to me and may contain a clue about why competitors are chasing lower prices in the pump | market. The revised standard cost for pumps is more than $4.00 below our present standard and would show a gross margin percentage of 27% compared to our current 22%. Maybe our competitors just have more modern cost accounting! Monthly Production and Cost Summary Flow Controllers Monthly Total Labor Costs Valves Pumps $16 Valves Flow Pumps Controllers Labor Rate (includes benefits) (hourly rate) Production/Shipments Monthly Production units runs 7,500 1 4,000 10 12,500 5 8 8 12 168 Set-up Labor (hours per production run) 0.25 0.5 0.4 9,725 Monthly Shipments units shipments 7,500 1 12,500 7 4,000 22 Run Labor (hours per unit) Flow Pumps Controllers Monthly Total Monthly Total Flow Pumps Controllers Valves Machine Hours Material Costs Valves 0.5 0.5 0.2 Material Component Count 10,800 4 5 10 Machine Hours (hours per units) 3 component count compenent cost Cost 2 $2 $4 $2 $6 4 $1 $4 component count compenent cost Cost 2 $6 $12 2 $7 $14 5 $2 $10 Manufacturing Overhead Overhead Receiving $20,000 Materials handling $200,000 Engineering $100,000 Packing & Shipping $60,000 Maintenance $30,000 Machine depreciation (10 yr) $270,000 Total $680,000 component count compenent cost Cost 0 $0 $0 0 $0 $0 1 $8 $8 TOTAL Component Cost $16 $20 $22 Total Cost by Product Line $120,000 $250,000 $88,000 $458,000