Ameritech International Inc. of Montreal has supported a research and development (R&D) department that for many years has been the sole contributor to the company's new products. The R&D activity is an overhead cost centre that provides services only to in-house manufacturing departments (four different product lines), all of which produce aerospace-related products.
The department has never sold its services outside, but because of its long history of success, larger manufacturers of aerospace products have approached Aerotech to hire its R&D department for special projects. Because the costs of operating the R&D department have been spiralling uncontrollably, Aerotech's management are considering taking on these outside contracts to absorb the increasing costs. However, management don't have any cost basis for charging R&D services to outsiders, and they need to gain control of their R&D costs. Management decide to implement an activity-based costing system in order to determine the charges for both outsiders and the in-house users of the department's services.
R&D activities fall into four pools with the following annual costs:

Analysis determines that the appropriate cost drivers and their usage for the four activities are as follows:
Activities .......................Cost Drivers................. Total Estimated Drivers
Market analysis ............Hours of analysis ................................7,500 hours
Product design ............Number of designs ..............................1,250 designs
Product development .Number of products ................................45 products
Prototype testing........... Number of tests ....................................350 tests
Instructions
(a) Calculate the activity-based overhead rate for each activity cost pool.
(b) How much cost would be charged to an in-house manufacturing department that consumed 900 hours of market analysis time, was provided with 140 designs relating to five products, and requested 46 engineering tests?
(c) How much cost would serve as the basis for pricing an R&D bid with an outside company on a contract that would consume 400 hours of analysis time, require 69 designs relating to three products, and result in 35 engineering tests?
(d) What is the benefit to Aerotech International Inc. of applying activity-based costing to its R&D activity to charge for both in-house and outside services?

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Market analysis Product design $262,500 Product development 900,000 Prototype testing 570,000 350,000