An appliance company manufactures its product in 3 models-Mini, Midi and Max. The company uses a company-wide absorption costing system based on direct labour hours. Costs computed using this method are marked up by 20% to obtain the price to distributors.

You are given the following information:

Product> Mini Midi Maxi

Material cost (/unit) 25 62.5 105

Direct labour Hrs / unit 0.5 1.0 1.0

Budgeted sales (units) 20,000 1,000 10,000

The budgeted overheads for the business amount to 4,410,000for the year.Direct labour is costed at 8 / Hr.

Due to severe competition the price of the Mini has been reduced, resulting in very low profitability. It has been suggested that the absorption costing system used does not accurately reflect the true cost of each product and that an activity-based costing approach should be considered. Analysing the overheads shows they fall into3 categories: Machining (2,780k), Logistics (590k), and Premises (1,040k). The respective 'drivers' of these costs are:machine hours, material orders and space.

You are given the following proportions of these drivers to each product:

Mini Midi Maxi

Machine hours 40% 15% 45%

Material orders 47% 6% 47%

Space 42% 18% 40%

Required:

A:Calculate the "full cost"and selling price of each product, determined by (i) Absorption costing.(ii) ABC costing.

B: What are the implications of the two methods of costing in this situation, and what are the strategic options for the business in light of the new information? Back up your comments with appropriate calculations.