1. 5-3 Explain the cost hierarchy concept, including unit-level, batch-level, product-sustaining-level, and facility-level costs.

Exhibit 5-3 Target and Actual Selling Prices: Dronze Inc. DRONZE factory, these traditional product-costing systems often are said to be volume-based (or throughput-based) costing systems. Trouble in Denver The profitability of Dronze Inc.'s Denver operation has been faltering in the past 18 months. The company's pricing policy has been to sell its drones to the online retailers at a price for each drone equal to 120 percent of the full product cost. Thus, the targeted prices were determined as shown in Exhibit 5-3. Also shown are the actual prices that Dronze Inc. has been obtaining for its products. However, due to price competition from other drone manufacturers, the company has been forced to sell its DZ-Standard (STD) drones for $585, approximately $10 below their target price of $595.20. The fierce competition had also forced management to reduce the price of the DZ-Deluxe drone (DEL) to $705, almost $20 below its target price of $724.80. Even at this lower price, the sales team was having difficulty getting orders for its planned volume of DZ-Deluxe drone production. Fortunately, the disappointing profitability of the DZ-Standard and DZ-Deluxe model drones was partially offset by greater than expected profits on the DZ-Ultimate (ULT) drone model. Dronze Inc. sales personnel had discovered that the company was swamped with orders when the DZ-Ultimate drone's original market price of $905 (approximating the calculated target price of $902.40 ) was announced. Consequently, in response to market demand, management had raised the price on the DZ-Ultimate drone several times, and eventually the product was selling well for $940. Even at this price, the online retailers selling Dronze Inc.'s drones did not seem to hesitate to place orders. Moreover, the company's competitors did not mount a challenge in the market for DZ-Ultimate drones. Dronze Inc.'s management was pleased to own a market niche with the DZ-Ultimate drone, which appeared to be a highly profitable, low-volume specialty product. Nevertheless, concern continued to mount in Denver about the difficulty in the DZ-Standard and DZ-Deluxe drone markets. After all, these were the Denver plant's bread-and-butter products, with projected annual sales of 10,000DZ-Standard drones and 8,000 DZ-Deluxe drones