Dunes and Stars Company is a manufacturer of tents and camping accessories. The company's plant manufactures three product lines, each producing a tent brand. These brands are Model (1), Model (2), and Model (3). Until recently,the company's plant used a job-order product-costing system. The cost of each product was the sum of its actual direct-material cost, actual direct-labour cost, and applied manufacturing overhead as follows:

Exhibit (1)

Products Cost items	Model (1)	Model (2)	Model (3)
Planned annual production	15,000	12,000	3,000
Raw material cost per unit	$200	$240	$360
Labour wage rate per hour	$20	$20	$20
Labour hours required per unit	9 hours	11 hours	13 hours

Overhead was applied using a predetermined overhead rate based on direct labour hours. Using the traditional system, all of theDunes and Starsplant's budgeted manufacturing overhead costs are lumped together in a single cost pool.

Trouble inDunes and Stars Company

The profitability ofDunes and Stars Company operation has been faltering in recent years. The company's pricing policy has set a target price for each tent equal to 120% of the total product cost. However, the actual prices of these products are different when compared to volume-costing system-based targeted prices, as shown in the following table:

Exhibit (2)

Product price	Model (1)	Model (2)	Model (3)
Actual selling price	$1,199.99	$1,399.99	$1,599.99

Due to price competition from other Tent manufacturers, Model (1) Tents were sold at lower prices than the target. Moreover,Dunes and Stars Company's competition forced management to reduce the price of Model (2) Tent. Even at this lower price, the sales team had difficulty getting orders for its planned volume of Model (2) Tent production. Fortunately, the disappointing profitability of Model (1) and Model (2) Tents were partially offset by greater-than-expected profits on the Model (3) line of Tents.Dunes and Stars Company's sales personnel had discovered that the company was swamped with orders when Model (3)'s price was determined.

Consequently, management raised the price of Model (3) Tent several times, eventually raising the product's price. Even at this price,Dunes and Stars Company's customers did not hesitate to place orders. Moreover, the company's competitors did not mount a challenge in Model (3) line of Tents market.Dunes and Stars Company's management was pleased to have a niche for Model (3) Tent market, which appeared to be a highly profitable, low-volume speciality product. Nevertheless, concern continued to mount inDunes and Starsabout the difficulty in the company's Model (1) and Model (2) Tent markets. After all, these were theDunes and Stars plant's bread-and-butter products, with projected annual sales of 15,000 Model (1) Tents, 12,000 Model (2) Tents and 3,000 Model (3) Tents.

New costing system and data collection

Dunes and Stars Company's director of cost management, Hamilton Burger, had been thinking for some time about refining theDunes and Stars plant's product-costing system. He wondered if the traditional, volume-based system provided management with accurate data about product costs. Burger had read about Activity-based Costing (ABC) systems, which follow a two-stage procedure to assign product overhead costs.

Dunes and Stars Company had formed a team to collect data for the ABC system. In the first stage, the team identified significant activities in producing the three products and assigned overhead costs to each activity based on the cost of the organization's resources of activity cost pools. In stage two of the activity-based costing project, the team identified cost drivers for each activity cost pool that have been used forDunes and Stars Company's three product lines, as shown in the following exhibit:

Exhibit (3)

Activity	Activity Driver	Activity Cost Pool	Product lines
Model (1)	Model (2)	Model (3)
Machinery	Machine hours	1,860,000	100,000	97,500	35,000
Set-up	Production runs	2,100,000	80	80	40
Purchasing	Purchase orders	3,000,000	200	192	208
Material-Handling	Production runs	3,400,000	80	80	40
Quality-Assurance	Inspection hours	1,100,000	800	800	600
Packing/Shipping	Shipments	2,640,000	1,000	800	400
Engineering Design	Engineering hours	1,300,000	500	400	400
Facility	Machine hours	2,300,000	100,000	96,000	34,000

ABC-based customer profitability analysis

TWO more years have passed, and the company has successfully implemented its activity-based costing system in itsDunes and Stars plant, at a recent strategy meeting with her senior company management team,Dunes and Stars Company's president and CEO expressed interest in assessing the profitability of the company's various customer relationships. He found support for the idea from the director of cost management, who had been reading about customer-profitability analysis in some of his professional journals. The company's marketing manager also expressed interest in customer-profitability analysis since he is concerned about the profitability of a couple ofDunes and Stars Company's customers. "We have a few customers who seem to want the moon and the stars when it comes to customer service," he complained. "I know the customer is always right, but you have to wonder if we are making any money from a couple of these customers, what with all the extra design and packaging they demand. Moreover, some customers require extra attention to sales calls, order processing, and billing. If we had a better idea of each customer's profitability, it would help our marketing and sales staff to focus their efforts."

The controller soon had his cost management staff attacking the customer-profitability analysis that the president had requested. The first step required an activity-based costing analysis of certain customer-related costs that could seriously affect a customer's profitability. Recall that ABC analysis relies on a cost hierarchy with cost levels, such as unit-level, batch-level, product-line-level, customer-level, and facility or general operations-level costs. In using activity-based costing, the cost management team focuses on customer-related costs. After extensive analysis and several interviews with personnel throughoutDunes and Stars Company, the cost management team came up with the ABC analysis in the following table:

Based on the activity-based costing information, the cost management team assessed the profitability of each ofDunes and Stars Company's customer relationships. Detailed information from that analysis for five of these customers appears in the following table:

Exhibit (4)

	Tents Lines	Total sold units	Customer 1	Customer 2	Customer 3	Customer 4	Customer 5
Sold Units of tents	Model (1)	15,000	4,500	10,500	0	0	0
Model (2)	12,000	4,000	1,500	5,000	1,500	0
Model (3)	3,000	0	0	0	1,500	1,500
	Total	30,000	8,500	12,000	5,000	1,500	1,500

Exhibit (5)

Selling andadministrative costs:	Cost driver base	Cost pool	Customer 1	Customer 2	Customer 3	Customer 4	Customer 5
Generaladministrative costs	Orders	$1,000,000	34	35	57	448	456
Customer related costs (Selling costs)
Order processing	Orders	168,000	34	35	57	448	456
Sales contracts	Contracts	120,300	10	24	35	241	388
Sales visits	Visits	201,000	44	20	47	58	32
Shipment processing	Shipments	188,800	165	139	220	223	96
Billing and collection	Invoices	160,000	110	88	120	240	260
Design engineering changes	Design engineering changes	850,000	30	40	50	280	370
Special packaging	Units packaged	300,840	200	683	850	1,110	1,920
Special handling	Units handled	181,840	4,500	6,000	3,500	4,000	2,000
Total customer-related costs (selling costs)		2,170,780
Total selling andadministrative costs		3,170,780

Please help in providing the full answer of these:

1. 1. The management ofDunes and Stars Companynotes that cost accuracy is crucial to rationalising the short- and long-term decision-making process for customer retainment. By using all relevant data calculate (a) product cost, (b) selling price, and (c) product profitability for Model (1), Model (2) and Model (3) using volume-based costing systems.
   2. The management ofDunes and Stars Companynotes that cost accuracy is crucial to rationalising the short- and long-term decision-making process for customer retainment. By using all relevant data calculate(a) product cost, (b) selling price, and (c) product profitability for Model (1), Model (2) and Model (3) using activity-based costing systems.
2. 1. estimated product cost calculated in (2.1), determine the profitability of five customers using volume-based costing systems.
   2. estimated product cost calculated in (2.2), determine the profitability of five customers using activity-based costing systems.