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Ontario, Inc., manufactures two products, Standard and Enhanced, and applies overhead on the basis of direct$-$labor hours. Anticipated overhead and direct$-$labor time for the upcoming accounting period are $$800,000$ and $25,000$ hours, respectively. Information about the company$$s products follows.

Standard:

Estimated production volume, $3,000$ units

Direct$-$material cost, $$25$ per unit

Direct labor per unit, $3$ hours at $$12$ per hour

Enhanced:

Estimated production volume, $4,000$ units

Direct$-$material cost, $$40$ per unit

Direct labor per unit, $4$ hours at $$12$ per hour

Ontario$$s overhead of $$800,000$ can be identified with three major activities: order processing $($$$150,000),$ machine processing $($$$560,000),$ and product inspection $($$$90,000).$ These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively. Data relevant to these activities follow.

Orders Processed Machine Hours Worked Inspection Hours

Standard $30018,0002,000$

Enhanced $20022,0008,000$

Total $50040,00010,000$

Top management is very concerned about declining profitability despite a healthy increase in sales volume. The decrease in income is especially puzzling because the company recently undertook a massive plant renovation during which new, highly automated machinery was installed$$machinery that was expected to produce significant operating efficiencies.

Required:

$1.$ Assuming use of direct$-$labor hours to apply overhead to production, compute the unit manufacturing costs of the Standard and Enhanced products if the expected manufacturing volume is attained.

$2.$ Assuming use of activity$-$based costing, compute the unit manufacturing costs of the Standard and Enhanced products if the expected manufacturing volume is attained.

$3.$ Ontario$$s selling prices are based heavily on cost$.$

a$.$ By using direct$-$labor hours as an application base, which product is overcosted and which product is undercosted? Calculate the amount of the cost distortion for each product.

b$.$ Is it possible that overcosting and undercosting $($i$.$e$.,$ cost distortion$)$ and the subsequent determination of selling prices are contributing to the company$$s profit woes? Explain.

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