Your Tasks:

1. Calculate OAs current plantwide overhead rate based on direct labor hours.

2. Verify OAs calculation of overhead cost per unit of $12.34 for shafts and $6.25 for gears.

3. Calculate the manufacturing overhead cost per unit for shafts and gears using activity-based costing, assuming each of the five cost pools represents a separate activity pool. Use the most appropriate activity driver for assigning activity costs to the two products.

4. Comment on OAs current cost system and the reason the company is facing fierce competition for shafts but little competition for gears.

. Outback Amalgamated (OA) produces machine parts as a contract provider for large manufacturing companies. OA produces two particular parts, shafts and gears. The competition is keen among contract producers, and OA's top management realizes how vulnerable its market is to cost-cutting competitors. Hence, having a very accurate understanding of costs is important to OA's survival. OA's president, Kanga Roo, has observed that the company's current cost to produce shafts is $21.41, and the current cost to produce gears is $12.73. She indicated to the controller that she suspects some problems with the cost system because OA is suddenly experiencing extraordinary competition on shafts, but it seems to have a virtual corner on the gears market. She is even considering dropping the shaft line and converting the company to a one-product manufacturer of gears. She asked the controller, Q. T. Koala, to conduct a thorough cost study and to consider whether changes in the cost system are necessary. The controller collected the following data about the company's costs and various manufacturing activities for the most recent month: Shafts 47,000 $31.95 $12.34 $9.07 Production units Selling price Overhead per unit (based on direct labor hours) Materials and direct labor cost per unit Number of production runs Number of purchasing and receiving orders processed Number of machine hours Number of direct labor hours Number of engineering hours Number of material moves Gears 16,000 $23.50 $6.25 $6.48 25 110 6,000 5,000 5,000 30 50 12,750 29,000 5,000 40 The controller was able to summarize the company's total manufacturing overhead into the following pools: Setup costs $ 40,000 Machine costs 180,000 Purchasing and receiving costs 200,000 Engineering costs 190,000 Materials handling costs 70,000 Total $ 680,000