Part 1: Compute overhead and gross margin using traditional costing

Per Unit	Part 127	Part 234
Overhead/unit	$12.83	$5.77
Gross Margin: Selling Price/unit	$31.86	$24.00
Prime costs/unit	$9.53	$8.26
Overhead/unit	$12.83	$5.77
Gross margin/unit	$9.50	$9.97
Total	Part 127	Part 234
Total Profit	$4,752,156	$996,844

Part 2: Select the best cost driver and compute overhead rates for each cost pool.

Cost pool	Cost driver	Overhead rate
Setup costs	# of production runs	$800.00
Material handling costs	Material moves	$1,00.00
Machine costs	Machine hours	$9.00
Receiving costs	Receiving orders	$1,500.00
Engineering costs	Engineering hours	$150.00
General plant costs	Direct labor hours	$2.00

Part 3: Compute overhead and gross margin using Activity-based Costing

Per Unit	Part 127	Part 234
Overhead/unit	$7.14	$34.19
Gross Margin: Selling Price/unit	$31.86	$24.00
Prime costs/unit	$9.53	$8.26
Overhead/unit	$7.14	$34.19
Gross margin/unit	$15.19	($18.45)
Total	Part 127	Part 234
Total Profit	$7,593,852	($1,844,852)

Part 4: increase in price for product 234 by 25%

Per Unit	Part 127	Part 234
Selling Price/unit	$31.86	$30.00
Prime costs/unit	$9.53	$8.26
Overhead/unit	$11.65	$11.65
Gross margin/unit	$10.68	$10.09
Total	Part 127	Part 234
Total Profit	$5,340,000	$1,009,000

Part 5: increase in price for product 127 by 20%

Per Unit	Part 127	Part 234
Selling Price/unit	$38.23	$24.00
Prime costs/unit	$9.53	$8.26
Overhead/unit	$11.65	$11.65
Gross margin/unit	$17.05	$4.09
Total	Part 127	Part 234
Total Profit	$8,525,000	$409,000

Part 6: part 127 & 234 by 15%

Per Unit	Part 127	Part 234
Selling Price/unit	$36.64	$27.60
Prime costs/unit	$9.53	$8.26
Overhead/unit	$11.65	$11.65
Gross margin/unit	$15.46	$7.69
Total	Part 127	Part 234
Total Profit	$7,730,000	$769,000

(1) Argue for the use of Activity-based Costing by in this case by:

a) Describing when Activity-based Costing is appropriate and when Traditional Costing is appropriate and when each is not appropriate to use.

b) Discussing what are the strengths and weaknesses of ABC? When is it appropriate to use? What kinds of business situations suggest the need for ABC?

c) Applying a &b to the case and arguing for an Activity-based Costing system.

(2) Describe the Activity-based costing system you are recommending. Include a justification for the cost driver selected.

(3) Present your new cost findings. Include both per unit and total cost data. There should be tables with cost information included.

(4) Make strategy recommendations for each product and for the plant. Use the cost and profit numbers to justify these recommendations.

(5) Comment on the validity of the plant managers concern that competitors are selling below the cost of making Part 127.

(6) Explain the apparent lack of competition for Part 234 and the customers response to potential price increase.

(7) Make any other additional recommendations or suggestions.