Beztec Limited produces two models of Printers: the Lexon, whichBeztec has produced since 2014 and sells for $990; and the Protox,a newer model introduced in 2016 that sells for $1254. Based on thefollowing income statement for the year ended 31 December 2017,senior management at Beztec have decided to concentrate marketingresources on the Protox model and to begin to phase out the Lexonmodel because the Protox generates a much bigger operating profitper unit.

Beztec Limited Income statement for the financial year ended 31December2017
	Lexon	Protox	Total
Revenues	$23 760 000	$7524 000	$31 284 000
Cost of goods sold	15 048 000	5 266 800	20 314 800
Gross margin	8 712 000	2 257 200	10 969 200
Selling and administrative expense	6 996 000	1 613 700	8 609 700
Operating income	$1 716 000	$643 500	$2 359 500
Units produced and sold	24 000	6 000
Operating income per unit sold	$71.50	$107.25

Details for cost of goods sold for Lexon and Protox are:

	Lexon		Protox
Costs	Total	Per unit	Total	Per unit
Direct materials	$5 491200	$228.80	$3 854 400	$642.40
Direct production laboura	475 200	19.80	277 200	46.20
Machineb	3 801 600	158.40	475 200	79.20
Total direct	$9 768 000	$407.00	$4 606 800	$767.80
Production overheadc	$5 280 000	$220.00	$660 000	$110.00
Total cost of goods sold	$15 048 000	$627.00	$5 266 800	$877.80

^a Lexon requires1.5 hours per unit and Protox requires 3.5 hours per unit. Thedirect production labour rate is $13.20 per hour.

^bMachine costsinclude lease costs of the machine, repairs and maintenance. Lexonrequires 8 machine-hours per unit and Protox requires 4machine-hours per unit. The machine-hour rate is $19.80 perhour.

^c Production overhead costs are allocated toproducts based on machine-hours at the rate of $27.50 per hour.

Beztec’s management accountant, Sue Smith, is advocating the useof activity-based costing and activity-based management and hasgathered the following information about the company’s productionoverhead costs for the year ended 31December 2017.

		Activity-cost-driver quantities
Activity-cost driver (driver quantity)	Total activity costs	Lexon	Protox	Total
Soldering (number of solder points)	$1 165725	1 333 125	433 125	1 766 250
Shipments (number of shipments)	1 064 250	18 225	4 275	22 500
Quality control (number of inspections)	1 534 500	63 225	23 963	87 188
Purchase orders (number of orders)	1 176 120	90 113	123 727	213 840
Machine power (machine-hours)	71 280	198 000	18 000	216 000
Machine set-ups (number of set-ups)	928 125	18 000	15 750	33 750
Total production overhead	$5 9400 000

After completing her analysis, Smith shows the results toSteven Kay, the CEO of Beztec. Kay does not like what he sees. ‘Ifyou show headquarters this analysis, they are going to ask us tophase out the Protox line, which we have just introduced. Thiswhole costing stuff has been a major problem for us. First, Lexonwas not profitable and now Protox.

      ‘Looking at the ABC analysis, Isee problems. First, we do many more activities than the ones youhave listed. If you had included all activities, maybe yourconclusions would be different. We can’t afford to phase out eitherproduct, please alter the costs produced by the ABC system.’

Smith knows that her numbers are fairly accurate. As a quickcheck, she calculates the profitability of Lexon and Protox usingmore and different activity drivers. The set of activities andactivity rates she had used results in numbers that closelyapproximate those based on more detailed analyses. She is confidentthat headquarters, knowing that Protox was introduced onlyrecently, will not phase out Protox. She is also aware that asizeable portion of Kay’s bonus is based on division revenues.Phasing out either product would adversely affect his bonus. Still,she feels some pressure from Kay to do something. She asks for youradvice.

Requirements:

a) Calculate the cost driver rates for the variousactivities identified in the activity-based costing (ABC)system.

b) Calculate the cost of each model under activity basedcosting.