Tutorial 8 – Extension QuestionBig Bikes manufactures bikes. The company produces two models: the Ro

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Tutorial 8 – Extension QuestionBig Bikes manufactures bikes. The company produces two models: the Road Bike and the NormalBike. Data regarding the two bikes are as follows:Product Direct labour hoursper unitAnnual Production Total direct labourhoursRoad 1.5 10,000 Bikes 15,000Normal 1 35,000 Bikes 35,000The road bike requires $75 in direct materials per unit, whereas the normal bike requires $40. Thecompany pays an average direct labour rate of $13 per hour. The company has historically useddirect labour hours as the activity base for applying overhead to the bikes. Manufacturing overheadis estimated to be $1,664,000 per year. The road bike is more complex to manufacture than thenormal bike because it requires more machine time. Alex Glover, the company’s controller, isconsidering the use of activity based costing to apply overhead because the bikes require suchdifferent amounts of machining. Alex has identified the following four separate activity centres.Volume of annual activityActivity Centre Cost driver TraceablecostsRoad Bike Normal BikeMachine SetupNo. of Set ups $100,000 100 100Special Design Design Hours 364,000 900 100Production Direct labourhours900,000 15,000 35,000Machining MachineHours300,000 9,000 1,000a. Calculate the overhead rate based on traditional overhead allocation with directlabour hours as the base.b. Determine the total cost to produce one unit of each product (Use the overheadrate calculated in question A)c. Calculate the overhead rate for each activity centre based on activity basedcosting techniquesd. Determine the total cost to produce one unit of each product. Use the overheadrates calculated in question C.e. Explain why overhead cost shifted from high – volume product to the lowvolume product under activity based costing

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