1. Please analyze how to potentially avoid “Red Ocean Traps” using a hotel, retail, restaurant, healthcare, or entrepreneurship example.

Using a fast food example, how would they avoid each of the five red ocean traps as in the article.

TRAP ONE

Seeing Market-Creating Strategies as Customer-Oriented Approaches Generating new demand is at the heart of market- creating strategies. It hinges on converting non- customers into customers, as Salesforce.com did with its on-demand CRM software, which opened up a new market space by winning over small and midsize firms that had previously rejected CRM enterprise software.

The trouble is that managers, especially those in marketing, have been quite reasonably brought up to believe that the customer is king. It’s all too easy for them to assume, therefore, that market-creating strategies are customer led, which causes them to re exclusively stick to their focus on existing customers and how to make them happier.

This approach, however, is unlikely to create new markets. To do that, an organization needs to turn its focus to noncustomers and why they refuse to patronize an industry’s offering. Noncustomers, not customers, hold the greatest insight into the points of pain and intimidation that limit the boundary of an industry. A focus on existing customers, by contrast, tends to drive organizations to come up with better solutions for them than what competitors currently o er—but keeps companies moored in red oceans.

Consider Sony’s launch of the Portable Reader System (PRS) in 2006. The company’s aim was to unlock a new market space in books by opening the e-reader market to a wide customer base. To gure out how to realize that goal, it looked to the experi- ence of existing e-reader customers, who were dissat- is ed with the size and poor display quality of current products. Sony’s response was a thin, lightweight de- vice with an easy-to-read screen. Despite the media’s praise and happier customers, the PRS lost out to Amazon’s Kindle because it failed to attract the mass of noncustomers whose main reason for rejecting e-readers was the shortage of worthwhile books, not the size and the display of the devices. Without a rich choice of titles and an easy way to download them, the noncustomers stuck to print books.

Amazon understood this when it launched the Kindle in 2007, offering more than four times the number of e-titles available from the PRS and mak- ing them easily downloadable over Wi-Fi. Within six hours of their release, Kindles sold out, as print book customers rapidly became e-reader custom- ers as well. Though Sony has since exited e-readers, the Kindle grew the industry from around a mere 2% of total book buyers in 2008 to 28% in 2014. It now o ers more than 2.5 million e-titles.

TRAP TWO

Treating Market-Creating Strategies
as Niche Strategies
The eld of marketing has placed great emphasis on using ever ner market segmentation to identify and capture niche markets. Though niche strategies can often be very e ective, uncovering a niche in an ex- isting space is not the same thing as identifying a new market space.

Consider Song, an airline launched in 2003 by Delta. Delta’s aim was to create a new market space in low-cost carriers by targeting a distinct segment of i- ers. It decided to focus on stylish professional women travelers, a segment it gured had needs and prefer- ences di erent from those of the businessmen and other passengers most airlines targeted. No airline had ever been built around this group. After many focus group discussions with upwardly mobile and professional women, Delta came up with a plan to cater to them with organic food, custom cocktails, a variety of entertainment choices, free in- ight work- outs with complementary exercise bands, and crew members dressed in Kate Spade. The strategy was intended to ll a gap in the market. It may well have done that successfully, but the segment proved too small to be sustainable despite competitive pricing. Song ew its last ight in April 2006, just 36 months after its launch.

Successful market-creating strategies don’t fo- cus on a finer segmentation. More often, they “deseg- ment” markets by identifying key commonalities across buyer groups that could help generate broader demand. Pret A Manger, a British food chain, looked across three di erent prepared-lunch buyer groups: restaurant-going professionals, fast food customers, and the brown bag set. Although there were plenty of di erences across these groups, there were three key commonalities: All of them wanted a lunch that was fresh and healthful, wanted it fast, and wanted it at a reasonable price. That insight helped Pret A Manger see how it could unlock and aggregate untapped de- mand across those groups to create a commercially compelling new market. Its concept was to offer restaurant-quality sandwiches made fresh every day from high-end ingredients, preparing them at a speed even greater than that of fast food, and deliv- ering that experience in a sleek setting at reasonable prices. Today, nearly 30 years on, Pret A Manger con- tinues to enjoy robust pro table growth in the new market space it established.

TRAP THREE

Confusing Technology Innovation
with Market-Creating Strategies
R&D and technology innovation are widely recog- nized as key drivers of market development and in- dustry growth. It’s understandable, therefore, that managers might assume that they are also key drivers in the discovery of new markets. But the reality is that market creation is not inevitably about technological innovation. Yellow Tail opened a new market (in its case, for a fun and simple wine for everyone) with- out any bleeding-edge technologies. So did the chain Starbucks and the performing arts company Cirque du Soleil. Even when technology is heavily in- volved, as it was with market creators Salesforce.com, Intuit’s Quicken, or Uber, it is not the reason that new o erings are successful. Such products and services succeed because they are so simple to use, fun, and productive that people fall in love with them. The technology that enables them essentially disappears from buyers’ minds.

Consider the Segway Personal Transporter, which was launched in 2001. Was it a technology innova- tion? Sure. It was the world’s rst self-balancing hu- man transporter, and it worked well. Lean forward and you go forward; lean back and you go back. This engineering marvel was one of the most-talked- about technology innovations of its time. But most people were unwilling to pay up to $5,000 for a prod- uct that posed di culties in use and convenience: Where could you park it? How would you take it with you in a car? Where could you use it—sidewalks or roads? Could you take it on a bus or a train? Although the Segway was expected to reach breakeven just six months after its launch, sales fell way below initial predictions, and the company was sold in 2009. Not everyone was surprised. At the time of the product’s release, a prescient Time magazine article about Dean Kamen, Segway’s inventor, struck a cautionary note: “One of the hardest truths for any technologist to hear is that success or failure in business is rarely determined by the quality of the technology.”

Value innovation, not technology innovation, is what launches commercially compelling new mar- kets. Successful new products or services open mar- ket spaces by o ering a leap in productivity, simplic- ity, ease of use, convenience, fun, or environmental friendliness. But when companies mistakenly as- sume that market creation hinges on breakthrough technologies, their organizations tend to push for products or services that are too “out there,” too complicated, or, like the Segway, lacking a necessary ecosystem. In fact, many technology innovations fail to create new markets even if they win the company accolades and their developers scienti c prizes.

TRAP FOUR

Equating Creative Destruction
with Market Creation
Joseph Schumpeter’s theory of creative destruction lies at the heart of innovation economics. Creative destruction occurs when an invention disrupts a market by displacing an earlier technology or existing product or service. Digital photography, for example, wiped out the photographic lm industry, becoming the new norm. In Schumpeter’s framework, the old is incessantly destroyed and replaced by the new.

But does market creation always involve destruc- tion? The answer is no. It also involves nondestruc- tive creation, wherein new demand is created with- out displacing existing products or services. Take Viagra, which established a new market in lifestyle drugs. Did Viagra make any earlier technology or ex- isting product or service obsolete? No. It unlocked new demand by o ering for the rst time a real solu- tion to a major problem experienced by many men in their personal relationships. Grameen Bank’s cre- ation of the micro nance industry is another exam- ple. Many market-creating moves are nondestructive, because they o er solutions where none previously existed. We’ve also seen this happen with the social networking and crowdfunding industries. And even when a certain amount of destruction is involved in market creation, nondestructive creation is often a larger element than you might think. Nintendo’s Wii game player, for example, complemented more than replaced existing game systems, because it attracted younger children and older adults who hadn’t previously played video games.

Con ating market creation with creative destruc- tion not only limits an organization’s set of opportu- nities but also sets o resistance to market-creating strategies. People in established companies typically don’t like the notion of creative destruction or disrup- tion because it may threaten their current status and jobs. As a result, managers often undermine their company’s market-creating e orts by starving them of resources, allocating undue overhead costs to the initiatives, or not cooperating with the people work- ing on them. It’s critical for market creators to head this danger o early by clarifying that their project is at least as much about nondestructive creation as it is about disruption.

TRAP FIVE

Equating Market-Creating
Strategies with Differentiation
In a competitive industry companies tend to choose their position on what economists call the “produc- tivity frontier,” the range of value-cost trade-offs that are available given the structure and norms of the industry. Di erentiation is the strategic position on this frontier in which a company stands out from competitors by providing premium value; the trade- o is usually higher costs to the company and higher prices for customers. We’ve found that many man- agers assume that market creation is the same thing.

In reality, a market-creating move breaks the value-cost trade-off. It is about pursuing differen- tiation and low cost simultaneously. Are Yellow Tail and Salesforce.com di erentiated from other play- ers? You bet. But are Yellow Tail and Salesforce.com also low cost? Yes again. A market-creating move is a “both-and,” not an “either-or,” strategy. It’s impor- tant to realize this difference, because when com- panies mistakenly assume that market creation is synonymous with di erentiation, they often focus on what to improve or create to stand apart and pay scant heed to what they can eliminate or reduce to simultaneously achieve low cost. As a result, they may inadvertently become premium competitors in an existing industry space rather than discover a new market space of their own. Take BMW, which set out to establish a new mar- ket in urban transport with its launch of the C1 in

2000. Tra c problems in European cities are severe, and people waste many hours commuting by car there, so BMW wanted to develop a vehicle people could use to beat rush-hour congestion. The C1 was a two-wheeled scooter targeting the premium end of the market. Unlike other scooters, it had a roof and a full windshield with wipers. BMW also invested heavily in safety. The C1 held drivers in place with a four-point seat-belt system and protected them with an aluminum roll cage, two shoulder-height roll bars, and a crumple zone around the front wheel.

With all these extra features, the C1 was expen- sive to build, and its price ranged from $7,000 to $10,000—far more than the $3,000 to $5,000 that typical scooters fetched. Although the C1 succeeded in di erentiating itself within the scooter industry, it did not create the new market space in transportation BMW had hoped for. In the summer of 2003, BMW announced it was stopping production because the C1 hadn’t met sales expectations.

TRAP SIX

Equating Market-Creating Strategies with Low-Cost Strategies
This trap, in which managers assume that they can create a new market solely by driving down costs, is the obvious ip side of trap ve. When organizations see market-creating strategies as synonymous with low-cost strategies alone, they focus on what to elim- inate and reduce in current o erings and largely ig- nore what they should improve or create to increase the o erings’ value.

Ouya is a video-game console maker that fell into this trap. When the company began selling its prod- ucts, in June 2013, big players like Sony, Microsoft, and Nintendo were o ering consoles connected to TV screens and controllers that provided a high- quality gaming experience, for prices ranging from $199 to $419. With no low-cost console available, many people would play video games either on handheld devices or on TV screens connected to mobile devices via inexpensive cables.

An attempt to create a market space between high-end consoles and mobile handhelds, the $99 Ouya was introduced as a low-cost open-source

“microconsole” offering reasonable quality on TV screens and most games free to try. Although people admired the inexpensive, simple device, Ouya didn’t have the rich catalog of quality games, 3-D intensity, great graphics, and processing speed that traditional

gamers prized but the company had to some extent sacri ced to drop cost and price. At the same time, Ouya lacked the distinctive advantage of mobile handheld devices—namely, their play-on-the-go functionality. In the absence of those features, poten- tial gamers had no compelling reason to buy Ouyas. The company is now shopping itself to acquirers—on the basis of its sta ’s talent more than the strength of its console business—but as yet hasn’t found one.

Our point, again, is that a market-creating strat- egy takes a “both-and” approach: It pursues both di erentiation and low cost. In this framework, new market space is created not by pricing against the competition within an industry but by pricing against substitutes and alternatives that noncustomers are currently using. Accordingly, a new market does not have to be created at the low end of an industry. Instead it can be created at the high end, as Cirque du Soleil did in circus entertainment, Starbucks did in co ee, and Dyson did in vacuum cleaners.

Even when companies create new markets at the low end, the o erings also are clearly di erentiated in the eyes of buyers. Consider Southwest Airlines and Swatch. Southwest stands out for its friendly, fast, ground-transportation-in-the-air feel, while stylish, fun designs make Swatches a fashion state- ment. Both companies’ offerings are perceived as both di erentiated and low cost.

Laura, a new graduate from Cornell Unversity’s School of Hotel Administration, could not believe her good luck. She was recently offered a new entrylevel position as an operations analyst at ARAMARK, one of the most admired U.S. companies, according to Fortune magazine (ARAMARK is a leader in professional services, providing award-winning food services, facilities management, and uniform and career apparel to health care institutions, universities and school districts, stadiums and arenas, and businesses around the world). The reason for Laura’s excitement was also because of the unique opportunity she was getting in her first assignment: she was going to Beijing during the 2008 Olympics to work for ARAMARK food services. Over the years, ARAMARK has provided food services to many large-scale events, including the last 13 Olympic Games. For example, during the 2004 Athens Olympics, ARAMARK worked with its partner, the Daskalantonakis Group (the leading Greek hospitality and tourism group), to provide meals for the largest Olympic Village in history. The Olympic Village in Athens hosted Summer Olympic and Paralympic Games participants, coaches, officials and Games personnel. ARAMARK and the Daskalantonakis Group served more than two million meals to participants, coaches, and officials throughout the 60-day duration of both the Olympic and Paralympic Games. Some of the other large-scale food service events managed by ARAMARK included serving over 340,000 motor fans who attended one of the biggest events in Spain last year: the Spanish Formula 1 Grand Prix in Barcelona. More than 1,100 ARAMARK employees served attendees more than 9,000 fruit dishes, 120,000 sandwiches, 40,000 hot dogs, and 40,000 cups of coffee during the three-day event. Some specialty gourmet dishes were also served, such as barbequed lamb steak, pumpkin and orange soup, and sole rolls with shrimp cream. While preparing for her job interview, Laura had become aware of the large scale of ARAMARK’s food service engagements. However, nothing had prepared Laura for the scale of the Beijing 2008 Olympics food service operations; Laura and all the other new employees had received a pre-event memo from their new boss, which stated that the ARAMARK team would be responsible for serving 3.5 million meals during the event (or 10,000 people per hour) that would not only pack a punch for peak performance but had to have the smells and tastes of home. The food service operations would have a staff of nearly 7,000—including some 230 chefs from 10 countries— to feed almost 65,000 athletes, coaches, officials, and members of the media throughout the Olympics. The memo further stated that ARAMARK’s biggest challenge would be to ensure that the food arrived at the right time, at the right temperature, and in the right quantities. In addition, dining during the Olympics would also be a social experience. Therefore, ARAMARK had to ensure that the athletes and visiting dignitaries got the highest quality service for a great experience. The memo also included a table (see Table 12.4), which listed some of the key inventories that needed to be managed to ensure that the food service operation was successful. After going through the memo and the attached table, Laura wondered if she should still feel lucky or she should start panicking. Her job was to support the assistant director in effectively managing inventory for the food service operations. She wondered if she could apply the concepts she learned about lean enterprise in her final semester operations management class to this first “real-world” job. Table 12.4 Inventory for 2008 Beijing Olympics Food Service Operations To serve a “world menu” of more than 800 recipes throughout the Games requires: • 93,000 pounds of seafood • 130 tons of meat • 38,000 pounds of pasta (dry) • 134,000 pounds of rice (about 20 million half-cup servings when cooked) • 743,000 (or 232 tons) potatoes • 800,000 (or 44 tons) eggs • 1 million apples • 936,000 bananas • 312,000 oranges • 684,000 carrots • Nearly 24 tons of onions • 50,000 pounds of mushrooms • 57,000 pounds of cheese • 190,000 loaves of bread • 5,500 pounds of butter • 16,000 pounds of tofu • 20,000 heads of lettuce All those ingredients will create a rotating menu of: • 320 hot main entrée dishes • 160 vegetable and potato dishes • 128 rice and pasta dishes • 400 different dessert, pastry, and bakery items

QUESTIONS

1. What are the unique aspects of inventory management in large-scale food services such as ARAMARK’s Olympic Games operations?

2. What lean production concepts can Laura apply in the above context? What challenges will she face?

3. What are the limits to applying lean principles in large food service operations such as ARAMARK’s Olympic Games operations?

Note: This is one question. Please answer completely.

Superior Micro Products uses the weighted-average method in its process costing system. During January, the Delta Assembly Department completed its processing of 25,400 units and transferred them to the next department. The cost of beginning work in process inventory and the costs added during January amounted to $669,528 in total. The ending work in process inventory in January consisted of 3,200 units, which were 80% complete with respect to materials and 60% complete with respect to labor and overhead. The costs per equivalent unit for the month were as follows:

Required:

1. Compute the equivalent units of materials, labor, and overhead in the ending work in process inventory for the month.

2. Compute the cost of ending work in process inventory for materials, labor, overhead, and in total for January.

3. Compute the cost of the units transferred to the next department for materials, labor, overhead, and in total for January.

4. Prepare a cost reconciliation for January. (Note: You will not be able to break the cost to be accounted for into the cost of beginning work in process inventory and costs added during the month.)

Casual Shoe Company makes loafers. During the most recent year, Casual incurred total manufacturing costs of $18,500,000. Of this amount, $2,800,000 was direct material used and $10,800,000 was direct labor. Beginning balances for the year were Direct Materials, $800,000; Work-in-process Inventory, $600,000; and Finished Goods Inventory, $700,000. At the end of the year, balances were direct materials, $700,000; Work-in-process inventory, $1,600,000; and Finished goods inventory, $590,000.

Requirement 1. Analyze the inventory accounts to determine the cost of direct materials purchased during the year.

Direct material used -

Beginning direct materials -

Ending Direct Materials -

Purchases -

Requirement 2. Analyze the inventory accounts to determine the cost of goods manufactured for the year.

Beginning Work-in-Process Inventory

Direct Materials Used

Direct Labor

Manufacturing Overhead

Total Manufacturing Costs Incurred during the Year

Total Manufacturing Costs to Account For

Ending Work-in-Process Inventory

Cost of Goods Manufactured

Requirement 3. Analyze the inventory accounts to determine the cost of goods sold for the year.

Beginning Finished Goods Inventory

Cost of Goods Manufactured

Cost of Goods Available for Sale

Ending Finished Goods Inventory

Cost of Goods Sold

Statement of Cost of Goods Manufactured for a Manufacturing Company

Cost data for Sandusky Manufacturing Company for the month ended January 31 are as follows:

a. Prepare a cost of goods manufactured statement for January.

Lysiak Corporation uses an activity based costing system to assign overhead costs to products. In the first stage, two overhead costs--equipment depreciation and supervisory expense-are allocated to three activity cost pools--Machining, Order Filling, and Other--based on resource consumption. Data to perform these allocations appear below:

Distribution of Resource Consumption Across Activity Cost Pools:

In the second stage, Machining costs are assigned to products using machine-hours (MHs) and Order Filling costs are assigned to products using the number of orders. The costs in the Other activity cost pool are not assigned to products. Activity data for the company's two products follow:

Activity:

How much overhead cost is allocated to the Machining activity cost pool under activity-based costing in the first stage of allocation?

2.

Machining costs are assigned to products using machine-hours (MHs) and Order Filling costs are assigned to products using the number of orders. The costs in the Other activity cost pool are not assigned to products. Activity data for the company's two products follow:

Activity:

Finally, the costs of Machining and Order Filling are combined with the following sales and direct cost data to determine product margins.

Sales and Direct Cost Data:

What is the product margin for Product F7 under activity-based costing?

Sampson Company uses a job order cost system with overhead applied to products based on direct labor hours. Based on previous history, the company estimated its total overhead for the coming year (2016) to be $720000 and its total direct labor hours to be 24000. On January 1, 2010 the general ledger of Sampson Company revealed that it had one job in process (Job 102) for which it had incurred a total cost of $15,000. Job 101 had been finished the previous month for a total cost of $30,000 but was not yet sold. The company had a contract for Job 103 but had not started working on it yet. Other balances in Raw Materials Inventory and other assets, liabilities, and owner’s equity accounts are summarized here :

SAMPSON COMPANY General Ledger Accounts Raw Material Inventory Date Description Dr Cr Balance 1/1 Balance 10,000 (Dr) Work In Process Inventory (WIP) Date Description Dr Cr Balance 1/1 Balance 15,000 (Dr) Sales Revenue Date Description Dr Cr Balance Cash and other assets Date Description Dr Cr Balance 1/1 Balance 100,000 (Dr) Manufacturing Overhead Date Description Dr Cr Balance Finished Goods Inventory Date Description Dr Cr Balance 1/1 Balance 30,000(Dr) Cost of Goods Sold Date Description Dr Cr Balance Selling and administrative Expenses Date Description Dr Cr Balance Payables and Other Liabilities Date Description Dr Cr Balance 1/1 Balance 85,000 (Cr) Stockholders Equity Date Description Dr Cr Balance 1/1 Balance 70,000 (Cr) Individual Job Cost Sheets (subsidiary ledgers to WIP) Job 102 Job 103 Beginning Balance 15,000 - + Direct Materials + Direct Labor + Applied OH Total Manufacturing Cost During January, the company had the following transactions: (a) Purchased $10,000 worth of raw materials on account (b) Issued the following materials into production: Item Cost Explanation Direct Materials $7,000 Job 102,$2,000; Job 103,$5,000 Indirect Materials 2,000 Used on both jobs Total material issued $9,000 ( c ) Recorded salaries and wages payable as follows : Item Cost Explanation Direct Labor $10,000 Job 102,$6,000; Job 103,$4,000 Indirect Labor 4,000 For Factory supervision Salaries 5,000 For administrative staff Total Payroll cost $19,000 (d) Applied overhead to jobs based on the number of direct labor hours required : Job number Direct Labor Hours Job 102 300 hours Job 103 200 hours Total 500 hours (e) Recorded the following actual manufacturing costs: Item Cost Explanation Rent $6,000 Paid factory rent in cash Depreciation 5,000 Factory Equipment Insurance 3,000 Had one month of factory insurance policy expire Utilities 2,000 Received factory utility bill but did not pay it Total Cost $16,000 (f) Recorded the following general and administrative cost : Item Cost Explanation Advertising $2,000 Advertising paid in cash Depreciation 3,000 Office Equipment Other expenses 1,000 Micellaneous expenses incurred but not paid. Total Cost $6,000 (g) Sold Job 101, which is recorded in Finished Goods Inventory at a cost of $30,000 for $55,000 (h) Completed Job 102 but did not sell it; Job 103 is still in process at year-end. Required : 1. Compute and interpret the predetermined overhead rate. 2. How much overhead would be applied to jobs during the period? 3. Compute the total cost of Jobs 102 and 103 at the end of the period. Where would the cost of each of these jobs appear on the year-end balance Sheet? 4. Prepare journal entries to record the January transaction and post the entries to the general ledger T-accounts OR column accounts as given earlier in the problem. 5. Calculate the amount of over or underapplied overhead. 6. Prepare the journal entry to dispose of the overhead balance assuming that it had been a year-end balance instead of a month-end balance. Post the effect to the general ledger T-accounts/column accounts. 7. Prepare a statement of cost of goods manufactured and sold report including the adjustment for over or underapplied overhead. 8. Prepare a brief income statement for Sampson Company.

2. Your Aunt is thinking about opening a hardware store. She estimates that it would cost 500k per year to rent the location and buy the stock. In addition, she would have to quit her 50k/year job as an accountant.

Define Opportunity cost. What is your aunt's opportunity cost of running the hardware store for a year? If your aunt thinks she can sell 510k worth of merchandise in a year, should she open the store? Explain.

3. You are the CFO for a firm that sells digital music players. Your firm has the following average total cost schedule:

Your current level of production is 600 devices, all of which were sold. Someone calls desperate to buy one and offers 550 for it. Should you accept the offer? Why or why not?

7. Your cousin vinnie owns a painting company with the fixed cost of 200 dollars and following schedule for variable costs:

Calculate average fixed cost, average variable cost, and average total cost for each quantity. What is the efficient scale of the painting company?

Q1/ a. For the following three cases, calculate

i. The marginal revenue curve

ii. The level of output where MR = MC (i.e., set the equation from item i equal to marginal cost and solve for Q)

iii. The profit-maximizing price (i.e., plug your answer from equation ii into the demand curve)

iv. Total revenue and total cost at this level of output (something you learned in Chapter 11)

v. What entrepreneurs really care about—total profit

Case A: Demand: P = 40 − Q Fixed cost = 100 Marginal cost = 10

Case B: Demand: P = 100 − 2Q Fixed cost = 100 Marginal cost = 10

Case C: Demand: P = 100 − 2Q Fixed cost = 100 Marginal cost = 20.

b. What is the markup in each case? Measure it two ways: first in dollars, as price minus marginal cost, and then as a percentage markup [100 × (P – MC)/MC, reported as a percent].

c. If you solved part b correctly, you found that when costs rose from Case B to Case C, the monopolist’s optimal price increased. Why didn’t the monopolist charge that same higher price when costs were lower? After all, they are a monopolist, so they can charge what price they want. Explain in language that your grandmother could understand.

Velshi Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2015, manufacturing overhead cost estimates total $840,000 for an annual production capacity of 12 million pages.

For 2015 Velshi Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

Cost pool                          Manufacturing overhead costs             Activity level

Design changes                                                  $ 120,000    300 design changes

Setups                                                                  640,000               5,000 setups

Inspections                                                             80,000        8,000 inspections

   Total manufacturing overhead costs                   $840,000

During 2015, two customers, Money Managers and Hospital Systems, are expected to use the following printing services:

Activity                                                Money Managers       Hospital Systems

Pages                                                                     60,000                        76,000

Design changes                                                            10                               0

Setups                                                                          20                              10

Inspections                                                                   30                              38

25) Assuming activity-cost pools are used, what are the activity-cost driver rates for design changes, setups, and inspections cost pools?

26) Using the three cost pools to allocate overhead costs, what is the total manufacturing overhead cost estimate for Money Managers during 2015?

A) $13,700

B) $6,500

C) $6,860

D) $10,192