At its manufacturing plant in Adelaide, Exxon Electronics Company manufactures two products, A32 & Y41. For many years, the company has used a simple plantwide manufacturing overhead cost rate based on direct labour hours. A new plant accountant suggested that the company may be able to assign overhead costs to products more accurately by using an activity-based costing system that relies on a separate rete for each manufacturing activity that causes overhead costs.

After studying the plant's manufacturing activities and costs, the plant accountant has collected the following data for the last year.

Item

A32

Y41

Units produced and sold

50,000

100,000

Direct labour hours used

100,000

300,000

Direct Labour cost

$1,000,000

$4,500,000

Number of times handled

40,000

20,000

Number of parts

12,000

8,000

Number of design changes

2,000

1,000

Number of product setups

8,000

6,000

The accountant has also determined that actual manufacturing overhead cost incurred last year were as follows:

Cost Pool

Activity Costs

Handling

$3,000,000

Number of parts

$2,400,000

Design changes

$3,300,000

Setups

$2,800,000

Total

$11,500,000

The direct material cost for product A32 is $120 per unit, while for product Y41 it is $140 per unit.

Required:

1. a)Determine the unit cost of each product using direct labour hours to allocate all manufacturing overhead costs. (9 marks)
2. b)Determine the unit cost of each product using activity-based costing. (13 marks)
3. c)Which of the two methods produce more accurate estimates of product costs? Why? (6 marks)
4. d)Suppose Exxon has been setting its product prices by adding a 25% mark-up to its product cost. Compute the product prices based on the traditional costing & ABC system. (4 marks)
5. What would you recommend to Exxon regarding its pricing? Why?(7 marks)
6. e)What product level changes would you recommend based on ABC analysis? Who would be involved in bringing about your suggested changes? (6 marks)