Packard Inc. produces and sells mousetraps. The cost of a mousetrap can be broken down as follows:

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Direct materials . . . . . . . . . . . . $0.23 Direct labor . . . . . . . . . . . . . . . . 0.09 Manufacturing overhead . . . . . . . . 0.12 Cost per trap . . . . . . . . . . . . $0.44

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The traps are then sold for $120 \%$ of cost, or $\$ 0.53$ each. The manufacturing overhead is applied based on direct labor costs and was computed at the beginning of the year using the following estimates:

Estimated manufacturing overhead for the period . . . . . . . . . . . . . . . . . . . . . . $\$ 540,000$

Estimated direct labor costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $\$ 405,000$

Predetermined overhead rate (per direct labor dollar) . . . . . . . . . . . . . . . . . . $\$ 1.33$

During the year, several changes in the production process were made. The result is that expected overhead costs have been significantly reduced below the original estimate of $\$ 540,000$. For the first six months of the year, overhead costs of $\$ 272,000$ were actually incurred. For that same time period, actual direct labor costs were $\$ 204,000$. For the last six months of the year, overhead costs are expected to be $\$ 225,000$ and direct labor costs are expected to be $\$ 202,500$.

1. What changes (if any) should be made in the predetermined manufacturing overhead rate for Packard Inc.?

2. Assuming that direct materials and direct labor costs will remain the same for the last six months of the year, determine the new cost of a single mousetrap.
3. Since the cost of producing mousetraps dropped during the second half of the year, Packard can reduce the price of its traps and still earn its 20 percent markup on cost. Should the company reduce the price of its mousetraps? What factors would affect your decision?