4 (Activity-Based-Costing) 20 marks FE Ltd (FE) produces three products-A, B, C. During the previous fiscal year of 2018, FE incurred $2,000,000 of manufacturing overhead costs and produced 200,000 units product A, 20,000 units of product B and 50,000 units of product C. FE's overhead application rate was $10 per direct labour hour. Based on this rate, the cost per unit for each product group in 2018 was as follows: Direct materials Direct labour Overhead Total Product A $4.00 Product B Product C $40.00 $4.00 $6.00 $45.00 $15.00 $2.00 $30.00 $20.00 $12.00 $115.00 $39.00 The profitability of FE has been declining for the past three years despite the successful introduction of the new product B which has now captured more thana 50% share of the market. The production manager has been boasting that he can produce product B at a much cheaper price than any of his competitors, hence the reason FE can charge a much lower price for product b than its competitors and the consequent increase in market share. A special task force has been established to help the company understand the reason for its decline in profitability. The task force is considering a new costing system, that is an activity-based-costing system for 2019. The system will use four cost drivers: machine setups, purchase orders, scheduling and quality inspections. Data, from 2018 on the cost associated with each of the four activities is as follows: Machine Setups $100,000 Purchase orders $100,000 Scheduling $1,500,000 Quality Inspections- $300,000 Total $2,000,000 The task force determined that it will use the following allocation bases: Machine Setups Purchase orders Scheduling Number of setups Number of purchase orders Number of production orders Quality Inspections- Number of units produced Number of setups Product A 200 Volume measures for 2018 for each product and each allocation base were as follows: Product B Product C Total 400 400 1,000 Number of purchase orders 100 250 150 500 Number of production orders 250 1,500 750 2,500 Number of units produced 100,000 600,000 300,000 1,000,000 Required: a) Calculate the unit costs of the three products under the new activity-based costing system b) What insight is provided by the new profitability analysis? c) What should FE do to improve profitability? d) Discuss the reasons that the old cost accounting system at FE, may be distorting its product costs