Brian Mossler is the founder and owner of Clean Air Technology (CAT), a business that manufactures components for Air Pollution Monitoring Devices (APMD). CAT uses high-tech equipment and employs a highly skilled labour force, including experts with knowledge of air monitoring technology. All CATs buildings and equipment are leased, with the company owning minimal non-current assets.

Since it was first established two years ago, CAT has been operating at a loss. Total CAT losses or the last financial year were $1,310,000.

CAT manufactures eight (8) products and currently has one overseas customer. The customer sells APMDs to factories and city authorities.

The ABC costing information provided below is based on CATs two (2) most popular products (CO240 and COX80). The information is for the last financial year.

Activities	Driver	Total activity costs $	CO240 activity usage	COX80 activity usage	Total usage
Equipment adjustments	Machine hours	864,000	200	600	800
Product inspections	Inspection hours	660,000	800	1,600	2,400
Total allocated manufacturing overheads for the two (2) products		1,524,000

Notes:

• The two products have similar volumes.
• Total common support costs that have no cost driver were $480,000.
• Total CAT manufacturing overheads (including common costs) were $2,227,000.
• Manufacturing overheads are the only overheads incurred by CAT.
• Any increase in demand for CATs products is estimated to have a maximum increase in total manufacturing overheads of 10%.

	CO240 $	COX80 $	Total $	Gross margin
Gross margin	420,000	340,000	760,000	40%

Required:

1. Calculate the product costs and product profitability for CO240 and COX80 using the activity-based costing (ABC) method.
2. Advise if the ABC principles should be extended to all CATs products.
3. Discuss how the ABC calculations completed in (a) above could lead to profit improvements for CAT.