The HITEC Company manufactures multimedia equipment designed to be sold to universities. The company€™s southeastern plant has undergone production changes that have resulted in decreased usage of direct labor and increased usage of automated processes. As a result, management no longer believes that its overhead allocation method is accurate and is considering changing from a traditional overhead allocation to an activity-based method. The controller has chosen the following activity centers and cost drivers for overhead:

Required
A. Calculate the overhead rate for each cost driver.
B. An order for 1,000 video projectors had the following requirements:
Number of purchase orders ......... 3
Number of setups ............ 5
Number of product tests .......... 20
Machine hours .............. 1,500
How much total overhead should be assigned to this order?
C. What could management do to reduce the overhead costs assigned to these video projectors? What would be the impact on company net income of reducing overhead assigned to the videoprojectors?

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Cost Driver Number of orders Number of setups Number of tests Machine hours Overhead Cost Information Purchase orders Setup costs Testing costs Machine maintenance $200,000 300,000 420,000 800,000 Driver Activity 25,000 15,000 6,000 50,000