Please answer question 2 and show your work! Thank you! (The five equipmet setups are: Equipment Setups, Purchase Orders, Machining, Testing, Packaging)

The Joetrop Company is a publicly traded corporation that produces different types of digital control systems. My name is Alan Smith and I have worked for this company for the last ten years in the controller's office. I was both an accounting and finance major in university. The company currently produces 300 products and does not anticipate any new products coming out over the next three years. I have previously mentioned to my superiors that it is not appropriate for our firm to use a traditional accounting system where overhead costs are allocated across products at a rate of 600% ofdirect labor costs) when different products require different amounts of indirect resources. For example, under the traditional system all costs associated with testing of products for quality assurance purposes are part of overhead costs and therefore allocated across products based on direct labor costs. Yet, some of our products require as much as 5 hours of testing whereas some products require less than 1 minute of testing with no connection to direct labor costs. Given that traditional costing systems result in significant cost distortions when determining products costs and given that the firm now has revenues of over $400,000,000 a year, Joetrop has decided to adopt activity based costing over the next year or two Joetrop's management has hired Sabley Consulting to help us implement activity based costing. I will be acting as the liaison between our firm and Sabley. As part of the initial implementation phase,I have asked Sabley to derive the costs and profits associated with two of our products, caspion and sebant, so that these costs and profits could be compared with the costs and profits under our current traditional accounting system. I picked these products since Joetrop management believe they have ery different demands on indirect resources. Further, caspion is sold in large quantities whereas ebant is sold in small quantities and traditional accounting systems can cause large cost distortions in different directions for products sold in large and small quantities Current information from our existing system on a per unit basis is shown in Exhibit 1 Exhibit 1 Direct material Direct labor hours Direct labor wage rate per hour Sales price per unit caspion $28 0.2 $30 $80.00 sebant 28 0.2 30 $92.00 y staff has identified for Sabley five cost pools. Information on those cost pools and the related allocation bases are provided in Exhibit 2. Exhibit 2 Value of Allocation Base 40,000 160,000 900,000 720,000 1,200,000 Total Costs Equipment setups Purchase orders Machining Testing Packaging $11,200,000 $11,200,000 $58,500,000 $11,520,000 $10,200,000 Allocation Base Number of setups number of purchase orders number of machine hours number of testing hours number of containers