Brilliant Accents Company manufactures and sells three styles of kitchen faucets: Brass, Chrome, and White. Production takes 25, 25, and 10 machine hours to manufacture 1,000-unit batches of brass, chrome, and white faucets, respectively. The following additional data apply:
| Projected sales in units | 30,000 | 50,000 | 40,000 |
PER UNIT data:
| Direct materials | $ 8 | $ 4 | $ 8 |
Overhead cost based on direct labor hours
| (traditional system) | $12 | $ 3 | $ 9 |
Hours per 1000-unit batch:
Total overhead costs and activity levels for the year are estimated as follows:
| Activity | Overhead costs | Activity levels |
| Direct labor hours | 2,900 hours |
| Setups | $465,500 | 95 setup hours |
| Inspections | $405,000 | 2,700 inspection hours |
Required:
| a. | Using the traditional system, determine the operating profit per unit for the brass style of faucet. |
| b. | Determine the activity-cost-driver rate for setup costs and inspection costs. |
| c. | Using the ABC system, for the brass style of faucet: |
| 1. | compute the estimated overhead costs per unit. |
| 2. | compute the estimated operating profit per unit. |
| d. | Explain the difference between the profits obtained from the traditional system and the ABC |
system. Which system provides a better estimate of profitability? Why?
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