For this question only, assume that Sophia is considering introducing an enhanced version of the Maroon product that is expected to cost $180 per unit to produce. Sophia uses target costing to set its cost reduction goals. A recent market study revealed that 300,000 customers would be willing to pay $220 for the Maroon product over the product’s 3-year life cycle. Sophia’s stockholders require a 25% return on sales.

Sophia Enterprises manufactures two products, Maroon and Gold, for which the following information is available.

The company uses a traditional costing system, with total estimated manufacturing overhead of $800,000 applied to the two products on the basis of direct labor hours.

Calculate the gross margin per unit of the Maroon product under the current cost system (2 points).

For this question only assume that actual manufacturing overhead costs were $880,000 and actual direct labor hours were 52,200. How much is over/underapplied overhead? (3 points)

For the next 3 questions, assume that Sophia uses an ABC system and has collected the following incomplete information about four activity cost pools, selected cost drivers, activity rates, and activity proportions for each product line:

  1. Compute the amount of overhead cost that would be assigned to the two products for each of the four activities and in total. The materials handling cost assigned to the Maroon product is shown as an example (6 points).

Explain whether the Gold product was over or under-costed in the traditional cost system compared to ABC and why. (3 points)

For this question only, assume that Sophia is considering introducing an enhanced version of the Maroon product that is expected to cost $180 per unit to produce. Sophia uses target costing to set its cost reduction goals. A recent market study revealed that 300,000 customers would be willing to pay $220 for the Maroon product over the product’s 3-year life cycle. Sophia’s stockholders require a 25% return on sales.

What is the target cost per unit? (2 points)What is the total cost reduction target for the next three years? (2 points)

Provide two specific suggestions for how Sophia can use ABM to meet the cost reduction target calculated above (2 points):

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