Tough Thermos, Inc. manufactures two plastic thermos containers at its plastic moulding facility in Lethbridge, Alberta. Its large container, called the Ice House, has a volume of five litres, side carrying handles, a snap-down lid, and a side drain and plug. Its smaller container, called the Cool Chest, has a volume of two litres, an over-the-top carrying handle, which is part of a tilting lid, and a removable shelf. Both containers and their parts are made entirely of hard moulded plastic. The Ice House sells for $35 and the Cool Chest sells for $24. Th e production costs calculated per unit under traditional costing for each model in 2012 were as follows:
Traditional Costing ........................................................Ice House ...........Cool Chest
Direct materials ...................................................................$ 9.50 ................$ 6.00
Direct labour ($10 per hour) .......................................................8.00 ..................5.00
Manufacturing overhead ($17.08 per direct labour hour) .....................13.66 ..................8.54
Total per unit cost ..................................................................$31.16............... $19.54
In 2012, Tough Thermos manufactured 50,000 units of the Ice House and 20,000 units of the Cool Chest. The overhead rate of $17.08 per direct labour hour was determined by dividing total expected manufacturing overhead of $854,000 by the total direct labour hours (50,000) for the two models.
Under traditional costing, the gross profit on the two containers was $3.84 for the Ice House or $35 $31.16, and $4.46 for the Cool Chest or $24 $19.54. Th e gross margin rates on cost are 12% for the Ice House or $3.84 $31.16, and 23% for the Cool Chest or $4.46 $19.54. Because Tough Thermos can earn a gross margin rate on the Cool Chest that is nearly twice as great as that earned on the Ice House, with less investment in inventory and labour costs, its management is urging its sales staff to put its efforts into selling the Cool Chest over the Ice House. Before finalizing its decision, management asks the controller Sven Meza to prepare a product costing analysis using activity-based costing (ABC). Meza accumulates the following information about overhead for the year ended December 31, 2012:

The cost drivers used for each product were the following:

Instructions
(a) Assign the total 2012 manufacturing overhead costs to the two products using activity-based costing (ABC).
(b) What was the cost per unit and gross profit of each model using ABC costing?
(c) Are management's future plans for the two models sound?

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Estimated Expected Use of Activity-Based Overhead Cost Overhead Rate $40 per order Activities Purchasing Machine set-ups Extruding Quality control Cost Drivers Number of orders Number of set-ups Machine hours Tests and inspections Drivers 4,475 780 80,000 8,000 $179,000 195,000 320,000 160,000 $250 per set-up $4 per machine hour $20 per test Cost Drivers Purchase orders Miachin stp Cool Chest 1,975 300 20,000 3,000 Total 4,475 780 80,000 8,000 Ice House 2,500 480 Machine hours Tests and inspections 60,000 5,000