Scalar Manufacturing produces automobile parts in batches in one continuous manufacturing process. The company uses direct labour

Question:

Scalar Manufacturing produces automobile parts in batches in one continuous manufacturing process. The company uses direct labour hours to assign overhead to each part. Magda Malakova, the financial controller, is wondering what the reasons are for the low profits in 2016 and why the gear product line did not attain Scalar's 20% net profit margin target (net profit per unit on sale price). She has calculated the 2016 net profit per unit as follows:

Magda intends to implement activity-based costing at Scalar. design is completed, the equipment can be set up for batch production. Once the batch is completed, a sample is taken and inspected to see if the parts are within the tolerances allowed. The manufacturing process has five activities: engineering, set-ups, machining, inspection, and processing. Overhead has been assigned to each activity using direct attribution and resource drivers:
Engineering..............................$80,000
Set-ups....................................45,000
Machining...............................120,000
Inspection.................................60,000
Processing.................................35,000
Total overhead........................$340,000
Magda has identified activity drivers for each activity and listed their practical capacities:

Following are the production data in 2016 for brake disks and gears:

Instructions
(a) Using the activity-based approach, calculate the activity rates, the net profit per unit, and the net profit margin percent- age for both the brake disk and the gear.
(b) Explain why the new profit margin percentages for the brake disk and the gear are different from what they were originally.