"ArrowJet Ltd manufactures two different models of its famous video game console: the Hero and Villain models. The company has been producing the Hero model for 10 years; whereas the Villain model was introduced this year to appeal to a wider variety of consumers and capture a larger segment of the video game market. Once the Villain product line was introduced, profits declined rapidly. Management has become concerned about the accuracy of their costing system as sales of the Villain system have been increasing rapidly since being released.

ArrowJet Ltd currently allocates manufacturing overhead using direct labor hours as the cost driver. The company has estimated it will incur $2,500,000 in manufacturing overhead costs and produce 60,000 units of the Hero model and 8,000 units of the Villain model. The following information pertains to the production of the Hero and Villain models: "

Hero Villain

Direct Labour Hours per unit 2 3

Direct materials per unit $30 $55

Direct Labour per unit $40 $70

Selling Price $125 $225

Required

A) Calculate the cost to produce one unit of the Hero and Villain models using the current method of allocating manufacturing overhead (traditional costing). (3 marks)

B) The company has decided it wants to switch to Activity-Based Costing, and has identified the following four activities relevant to producing both the Hero and Villain lines. The relevant amounts for 2022 are:

Activity Cost Driver Cost Total units of driver Hero Villain

Shipping Number of shipments $500,000 850 400 450

Quality Control Number of inspections $600,000 2,500 1,000 1,500

Machine Setups Number of setups $750,000 350,000 200,000 150,000

Machine Maintenance Machine hours $650,000 500,000 350,000 150,000

$2,500,000

Using the activity based costing data above, compute the total cost to manufacture one unit of each model (6 marks)

C) Briefly explain the difference between how overhead is treated between ABC and traditional costing, and this difference's overall impact on costing the Villain model? (1 mark)