1. ACTIVITY BASED COSTING

Pristine Ltd manufactures two types of storage cabinets, deluxe and executive, and applies manufacturing overhead to all units at the rate of $110 per machine hour. Production information follows.

	Deluxe	Executive
Direct material cost	$52.50	$90.00
Direct labour cost	30.00	30.00
Budgeted volume (units)	8 000	15 000

The management accountant has determined that the firm's overhead can be identified with three activities: manufacturing setups, machine processing and product shipping. Data on the number of setups, machine hours and outgoing shipments, which are the activities' three respective cost drivers, follow:

	Deluxe	Executive	Total
Setups	50	30	80
Machine hours	16 000	22 500	38 500
Outgoing shipments	100	75	175

The firm's total overhead of $4 620 000 is subdivided as follows: manufacturing setups, $1 008 000; machine processing, $2 772 000; and product shipping, $840 000.

Required:

1. Calculate the unit manufacturing cost of deluxe and executive cabinets by using the company's current overhead costing procedures.
2. Calculate the unit manufacturing cost of deluxe and executive cabinets by using activity-based costing.
3. Calculate the aggregate amount by which the deluxe cabinet line is undercosted/overcosted by the company's current traditional overhead costing procedures. Then calculate the aggregate amount by which the traditional system undercosts/overcosts the executive cabinet line.
4. Assume that the current selling price of a deluxe cabinet is $390 and the marketing manager is contemplating a $45 discount to stimulate sales. Is this discount advisable? Briefly discuss.