A Limited manufactures three products, RIP, DIP and CIP. Demand for products RIP and DIP is relatively elastic whilst demand for product CIP 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 RIP, DIP and CIP for the next year are 40,000 units, 32,000 units and 44,000 units respectively. The budgeted direct costs of the three products are shown below:

PRODUCTS RIP DIP CIP

$per unit $ per unit $ per unit

Direct Material 50 56 44

Direct Labour($12per hour) 60 72 48

In the next year, Astro Limited also expects to incur indirect production costs of $2,654,800, which are analyzed as follows:

COST POOLS $ COST DRIVERS

Machine set up costs 480,000 Number of batches

Material ordering costs 632,000 Number of purchase orders

Machine running costs 840,000 Number of machine hours

General facility costs 722,800 Number of machine hours TOTAL 2654,800

The following additional data relate to each product:

PRODUCTS RIP DIP CIP

Batch size 500 800 400

No of purchase orders per batch 4 5 4

Machine hours per unit 1.5 1.25 1.4 A Limited 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 A Limited'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. (