based cost analysis LO1, 3, 4 (Appendix) in bringing about your suggested changes? 5-30 Product cost distortions with traditional costing, original activity-based costing analysis The Manhattan Company manufactures two models of compact disc players: a deluxe model and a regular model. The company has manufactured the regular model for years, the deluxe model was introduced recently to tap a new segment of the market. Since the introduction of the deluxe model, the company's profits have steadily declined, and management has become increasingly concerned about the accuracy of its costing system. Sales of the deluxe model have been increasing rapidly. The current cost accounting system allocates manufacturing support costs to the two products on the basis of direct labor hours. The company estimated that this year it will incur $1.2 million in manufacturing support costs and will produce 5,000 units of the deluxe model and 50,000 units of the regular model. The deluxe model requires four hours of direct labor, and the regular model requires two hours. Material and labor costs per unit and selling price per unit are as follows: has ITEM DELUXE REGULAR Direct materials cost Direct labor cost Selling price $50 60 200 $40 30 100 Required (a) Compute the manufacturing support cost driver rate for this year. (b) Determine the cost to manufacture one unit of each model. (c) The company has decided to trace manufacturing support costs to four activities. The manufacturing support costs traceable to the four activities this year are as follows: COST DRIVER UNITS DEMANDED ACTIVITY COST DRIVER COST TOTAL DELUXE REGULAR 600 Purchase orders Quality control Product setups Machine maintenance Number of orders Number of inspections Number of setups Machine hours 600 $200,000 250,000 400,000 350,000 $1,000,000 800 1,250 200 35,000 200 650 100 20,000 100 15,000 Compute the total cost to manufacture one unit of each model. (d) Compare the manufacturing activity resources demanded per unit of the regular model and per unit of the deluxe model. Why did the old costing system undercost the deluxe model? (e) Is the deluxe model as profitable as the company thinks it is under the old costing system? Explain (1) What should the Manhattan Company do to improve its profitability? Consider pricing and product-level changes among your suggestions. Who should be involved in implementing your recommendations? 228 Chapter 5 Activity-Based Cost Systems