Dan has recently set up a small business, which manufactures three different types of chair to customer order. The size of the batch is determined by the weekly customer orders. The three different types of chair are known as the Comfort, the Relaxer and the Scandinavia. The comfort is the most expensive of the range. The Relaxer is the middle-of-the range chair, and the cheapest of the range, the Scandinavia, is purely a wooden chair, but Dan feels it has great potential and hopes it will provide at least 50% of the sales revenue. Fred, an experienced but unqualified accountant produced figures for the past month (4 weeks), Dec 2019, which is considered a normal month in terms of costs:

Dan hopes to use these figures as the basis for budgets for the next three months. He is pleased to see that the organisation has made its first monthly profit, however small it might be. On the other hand, he is unhappy with Freds advice about the loss-making Scandinavia, which is, either to reduce its production or to increase its price. After much discussion Fred says that he has heard of a newer type of costing system, known as activity based costing (ABC), and that he will recalculate the position on this basis.

Required: (a) Recalculate the profit statement of each product using the ABC technique. (12 marks)

(b) Advise Dan if the ABC method should be adopted for this company and discuss whether the profit statement you calculate in part (a) provides an adequate basis to make decisions on the future production volume and price of the Scandinavia. (8 marks)

Profit statement for Dec 2019 Comfort Scandinavia Relaxer Units produced and sold during Dec 120 150 Selling price per chair Less: Costs per chair Material Labour 395 285 225 85 60 50 120 100 80 Overhead absorbed on labour hours 150 125 100 355 230 285 Profit per chair (5) 40 In order to do this, Fred extracted the following information: IIT Comfort Relaxer Scandinavia Wood (metres) per chair Leather (metres) per chair Labour (hours) per chair Set up activities : each type of chair is setup once per week for production 10 9. 4 24 20 16 The overheads included in Dec 2019's profit statement compromised: Cost driver Number of set-ups 5,600 4,000 2,400 3,200 6,000 13,300 Set-up costs Purchasing and checking leather hides Purchase of wood Metres of leather Metres of wood Metres of leather Quality inspection of leather seating Despatch and transport Administration and personnel costs Number of chairs Labour hours