Broadway Ltd manufactures two products, ALT500 and SDF450. Manufacturing overhead is allocated on the basis of direct labour hours. The anticipated manufacturing overhead for the upcoming accounting period is $560,000 and the expected direct labour hours are 16 000 hours.

Budgeted information for the two products follow:

ALT500:

Estimated production volume 3 000 units

Direct Material Cost $25 per unit

Direct labour per unit 2 hours at $12 per hour

SDF450:

Estimated production volume 4 000 units

Direct Material Cost $40 per unit

Direct labour per unit 2.5 hours at $12 per hour

Management is very concerned about declining profitability despite a healthy increase in sales volume. The CEO has heard about activity-based costing and has asked the management accounting team to collect relevant financial information relating to this costing system.

The management accounting team identified three major activities of manufacturing overhead: order processing ($105,000), machine processing ($392,000), and product inspection ($63,000). These activities are driven by the number of orders processed, machine hours worked and inspection hours, respectively.

Data relevant to these activities follow:

ALT500

240 Orders processed

11 000 Machine hours

2 000 Inspection hours

SDF450

160 orders

13500

Machine hours

4300 inspection hours

Total

400 orders

24500 machine hours

6300 inspection hours

i.Assuming the company uses activity-based costing to apply manufacturing overheads to production, calculate the unit product costs of ALT500 and SDF450 each, if the expected production volume is attained.

i.The selling prices are based heavily on cost. If traditional costing is used, the product cost for ALT500 is $119, and for SDF450, $157.50. By comparing the product costs calculated in (i) to the costs using traditional costing, discuss the effect the difference in product cost could have on the company's profit.