Diamond Co. is offering agreements for both clients. The agreements can be easily met by Co. however the profits for both agreements are uncertain

Data as follows:

Customer X Y

Module Type C15 C16

Agreement Quantity 1,000 unit 2,000 units

Material cost/unit $15 $20

Agreement worth ($) $27,000 $100,000

Casting hours 50 300

Lot Size 100 units 50 units

Casting time/ Lot 5 hours 7.5 hours

Annual Budgeted overheads as follows:

Activity Cost Driver Cost driver volume/yr Cost pool

Production

Management Agreements 20 $125,000

Assessment Lot 150 $75,000

Casting Casting hours 2,000 $150,000

Required:

(a) Calculate the profit for each job using Absorption costing (Traditional Costing). Absorb overheads using Casting hours. (Marks 6)

(b) Calculate the activity based costs and profits for each contract. (Marks 8)

(c) After a through analysis in part (a) suggest what could be done to make contract profitable. (Marks 2)