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Maxey & Sons manufactures two types of storage cabinetsTypeA and Type Band applies manufacturing overhead to all units at the rate of $136 per machine hour. Production information follows.

TypeA Type B

Anticipated volume (units) 27,200 51,000

Direct-material cost per unit $36 $54

Direct-labor cost per unit 41 41

The controller, who is studying the use of activity-based costing, has determined that the firm's overhead can be identified with three activities: manufacturing setups, machine processing, and product shipping. Data on the number of setups, machine hours, and outgoing shipments, which are the activities' three respective cost drivers, follow.

TypeA Type B Total

Setups 156 116 272

Machine hours 54,400 76,500 130,900

Outgoing shipments 200 150 350

The firm's total overhead of $17,802,400 is subdivided as follows: manufacturing setups, $3,884,160; machine processing, $10,681,440; and product shipping, $3,236,800.

Required:

1.Compute the unit manufacturing cost of TypeA and Type B storage cabinets by using the company's current overhead costing procedures.

2.Compute the unit manufacturing cost of TypeA and Type B storage cabinets by using activity-based costing.

3.Is the cost of the TypeA storage cabinet overstated or understated (i.e., distorted) by the use of machine hours to allocate total manufacturing overhead to production? By how much?

4.Assume that the current selling price of a TypeA storage cabinet is $398.00 and the marketing manager is contemplating a $44 discount to stimulate volume. Is this discount advisable?

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