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4-49 Activity-Based Costing and Activity-Based Management, Automotive Supplier O'Hanlon Company is an automotive component supplier. O'Hanlon has been approached by Chrysler's Ohio plant to consider expanding its production of part 24Z2 to a total annual quantity of 2,800 units. This part is a low-volume, complex product with a high gross margin that is based on a proposed (quoted) unit sales price of $8.20. O'Hanlon uses a traditional costing system that allocates indirect manufacturing costs based on direct-labor costs. The rate currently used to allocate indirect manufacturing costs is 500% of direct-labor cost. This rate is based on the $4,121,000 annual factory overhead cost divided by $824,200 annual direct-labor cost. To produce 2,800 units of 24Z2 requires $6,160 of direct materials and $1,960 of direct labor. The unit cost and gross margin percentage for part 24Z2 based on the traditional cost system are computed as follows: Per Unit Total $ 6,160 1,960 Direct material Direct labor Indirect production: (500% of direct labor) Total cost Sales price quoted Gross margin Gross margin percentage (+2,800) $2.20 .70 3.50 $6.40 9,800 $17,920 8.20 $1.80 22.0% The management of O'Hanlon decided to examine the effectiveness of their traditional costing system versus an activity-based costing system. The following data have been collected by a team consisting of accounting and engineering analysts: Activity Center Quality Production scheduling Setup Shipping Shipping administration Production Total indirect production cost Factory Overhead Costs (Annual) $ 880,000 72,000 880,000 384,000 105,000 1,800,000 $4,121,000 Annual Cost-Driver Quantity 16,000 800 Activity Center: Cost Drivers Quality: Number of pieces scrapped Production scheduling and set up: Number of setups Shipping: Number of containers shipped Shipping administration: Number of shipments Production: Number of machine hours 64,000 1,500 12,000 The accounting and engineering team has performed activity analysis and provides the following estimates for the total quantity of cost drivers to be used to produce 2,800 units of part 2472: Cost-Driver Consumption 150 5 Cost Driver Pieces scrapped Setups Containers shipped Shipments Machine hours 12 7 16 1. Prepare a schedule calculating the unit cost and gross margin of part 24Z2 using the activity- based costing approach. Use the cost drivers given as cost-allocation bases. 2. Based on the ABC results, which course of action would you recommend regarding the pro- posal by Chrysler? List the benefits and costs associated with implementing an ABC system at O'Hanlon