Cloud Ltd manufactures two types of radios: a standard model and a smaller portable model.The standard model sells for $35 and the portable for $24.The production costs calculated on a per unit basis for each model this year were as follows:

Traditional Costing

StandardPortable

Direct materials$9.50$6.00

Direct labour ($10 per hour)8.005.00

Manufact. overhead ($17.08 per DLH)13.668.54

Total per unit cost$31.16$19.54

During the year, Cloud Ltd manufactured 50,000 standard radios and 20,000 portable radios.The overhead application rate of $17.08 per direct labour hour was determined by dividing total expected manufacturing overhead of $854,000 by the total estimated direct labour hours (50,000) for the two models.

Under traditional costing, the per unit gross profits for the two models were as follows:

StandardPortable

Per unit selling price$35.00100%$24.00100%

Per unit cost31.1689%19.5481%

Per unit gross profit$3.84 11%$4.4619%

As the gross profit (in both dollars and percentage terms) on the portable model far exceeded that for the standard, company management are planning to emphasise the portable model in subsequent advertising and marketing activities.

However, before finalising the advertising and marketing plan the company's management accountant was asked to prepare a product costing analysis using activity-based costing (ABC).The management accountant accumulated the following information about overhead for the current year.

ActivitiesCost driversEstimatedExpected useActivity-based

overheadof cost drivers overhead rate

PurchasingNumber of $179,0004,475$40 per order

orders

Machine Number of$195,000780$250 per set-up

set-upsset-ups

AssemblyMachine$320,00080,000$4 per machine

hourshour

Quality control Tests $160,000 8,000$20 per test inspections

The cost drivers used for each product were:

Cost driversStandardPortableTotal

Purchase orders2,5001,9754,475

Machine set-ups480300780

Machine hours60,00020,00080,000

Tests and inspect.5,0003,0008,000

Requirements

(a)Assign the total manufacturing overhead costs to the two products using ABC. (Marks 5)

(b)Determine the cost per unit and gross profit of each model using ABC. (Marks 5)

(c)Evaluate management's plan to focus advertising and marketing activity on the portable model. (Marks 5)