3. The unit product cost of the high-volume product, Parcel, declines under
the activity-based costing system, whereas the unit product cost of the
low-volume product, Rascon, increases. This occurs because half of the
overhead is applied on the basis of engineering design hours instead of
direct labor-hours. When the overhead was applied on the basis of di-
rect labor-hours, most of the overhead was applied to the high-volume
product. However, when the overhead is applied on the basis of engi-
neering-hours, more of the overhead cost is shifted over to the low-
volume product. Engineering-hours is a product-level activity, so the
higher the volume, the lower the unit cost and the lower the volume,
the higher the unit cost.
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