Attrezzatura da Giardino Ltd (ADG) is a small family run business that produces a range of petrol powered garden equipment for professional gardeners. The owner/manager prides himself on the quality of ADGs products: All products are rigorously inspected prior to selling direct to the public via its website and come with a 5 year warranty covering parts and labour. Customer satisfaction is excellent but increasing competition from abroad coupled with reduced consumer spending as a result of the Covid19 pandemic has recently led to a decline in sales. Consequently management are considering downsizing production to discontinue the least profitable product: the Shredder. The shredder has a current profit margin of just 3% compared to approximately 30% for all the other products. ADG derives 90% of its sales from 3 products, the details of which are as follows:

Data	Products
	Shredder	Rotavator	Chainsaw
Selling price per unit	1279	340	599
Total output per product line (units)	1,300	3,000	5,000
Total sales value per product line	1,662,700	1,020,000	2,995,000
Direct labour hours per unit	23	3	8
Labour costs per unit at an average cost of 15 per hour	345.00	45.00	120.00
Material costs per unit	570.00	150.00	160.00

Overheads for the year are 1,137,782 and these are absorbed to products on the basis of direct labour hours.

Required:

1. Calculate the total cost per unit for the 3 products if overheads are absorbed on the basis of direct labour hours per unit and demonstrate how the profit margins were calculated. Your answer should provide, for each product, the total overhead absorbed and total profit as well as these figures on a per unit basis.

(6 marks)

The management accountant has suggested a review of costing and pricing processes before a decision whether or not to discontinue the shredder is made. The overhead pool has been analyzed as follows:

Overheads relating to administration and requisitions*		250,500.00
Building related overheads*		160,500.00
Senior management and support function salaries*		220,500.00
Warranty costs		42,000.00
Quality control costs		98,100.00
Machine related costs (depreciation, insurance etc.)		355,500.00
Set up costs		10,682.00
		1,137,782.00

The following analysis has also been undertake with respect to potential cost drivers

Data	Products
	Shredder	Rotavator	Chainsaw
Direct labour hours per unit	23	3	8
Total number of quality control inspections per product line (for total output)	36	60	66
Material costs per unit	570.00	150.00	160.00
Machine hours per unit	4	3	10
Warranty claims per year in relation to total output of each product	13	40	200
Batch sizes for production runs	25	50	100

Due to the complexity of activity mapping it has been decided that all overhead pools marked with * above should be absorbed to products on the basis of direct labour hours for this exploratory exercise.

2. Rework your calculations in a) but assuming that overheads are absorbed on the basis of activity based costing.

(9 marks)

3. Compare and contrast your answers to a) and b) and interpret the results in minimum of 200 words and maximum of 300 words. Provide advice to ADG with respect to the discontinuation of the Shredder, outline the consequences of this action.

(6 marks)

4. Provide recommendations to ADG with respect to next steps including advice regarding the potential benefits and costs associated with activity based costing for ADG in minumum of 200 words and maximum of 250 words .