Smart Electronics manufactures two types of gaming consoles, Models M-11 and R-24. Currently, the company allocates overhead costs based on direct labor hours; the total overhead cost for the past year was $80,000. Additional cost information for the past year is presented below.

Product Name	Total Direct Labor Hours Used	Units Sold	Direct Costs per Unit	Selling Price per Unit
M-11	650	1,300	$10	$90
R-24	150	1,500	$30	$60

Recently, the company lost bids on a contract to sell Model M-11 to a local wholesaler and was informed that a competitor offered a much lower price. Smart's controller believes that the cost reports do not accurately reflect the actual manufacturing costs and product profitability for these gaming consoles. He also believes that there is enough variation in the production process for Models M-11 and R-24 to warrant a better cost allocation system. Given the nature of the electronic gaming market, setting competitive prices is extremely crucial. The controller has decided to try activity-based costing and has gathered the following information.

	Number of Setups	Number of Components	Number of Material Movements
M-11		3		17		15
R-24		7		33		35
Total activity cost		$20,000		$50,000		$10,000

The number of setups, number of components, and number of material movements have been identified as activity-cost drivers for overhead.

Question #1: Using Smart's current costing system, calculate the gross margin per unit for Model M-11 and for Model R-24. Assume no beginning or ending inventory. Show your calculations.

Question #2: Using activity-based costing, calculate the gross margin for Model M-11 and for Model R-24. Assume no beginning or ending inventory. Show your calculations.

Question #3: Describe how Smart Electronics can use the activity-based costing information to formulate a more competitive pricing strategy. Be sure to include specific examples to justify the recommended strategy.

Question #4 - Identify and explain two advantages and two limitations of activity-based costing.