Duff Co manufactures three products, X, Y and Z. Demand for products X and Y is relatively

Question:

Duff Co manufactures three products, X, Y and Z. Demand for products X and Y is relatively elastic whilst demand for product Z is relatively inelastic. Each product uses the same materials and the same type of direct labour but in different quantities. For many years, the company has been using full absorption costing and absorbing overheads on the basis of direct labour hours. Selling prices are then determined using cost plus pricing. This is common within this industry, with most competitors applying a standard mark-up.Budgeted production and sales volumes for X, Y and Z for the next year are 20 000 units, 16 000 units and 22 000 units respectively.The budgeted direct costs of the three products are shown below:

In the next year, Duff Co also expects to incur indirect production costs of $1 377 400, which are analysed as follows:

The following additional data relate to each product:

Duff Co wants to boost sales revenue in order to increase profits but its capacity to do this is limited because of its use of cost plus pricing and the application of the standard mark-up. The finance director has suggested using activity based costing (ABC) instead of full absorption costing, since this will alter the cost of the products and may therefore enable a different price to be charged.

Required:(a) Calculate the budgeted full production cost per unit of each product using Duff Co?s current method of absorption costing. All workings should be to two decimal places.(b) Calculate the budgeted full production cost per unit of each product using activity-based costing. All workings should be to two decimal places.(c) Discuss the impact on the selling prices and the sales volumes OF EACH PRODUCT which a change to activity based costing would be expected to bring about.