1. Firm XYZ has fixed indirect costs of 100,000,000. The firm produces 1,000,000 units of product ABC. Additionally, for each unit produced, 50 of variable indirect costs are also incurred. Further, each unit produced consumes 2 direct labour hours, 5 machine hours and 20 of direct materials. The cost of 1 labour hour is 12.50 and it costs 5 per hour to run the machines. The firm also manufactures other products. In total it spends 75,000,000 on direct labour and 125,000,000 on running the machines. ABC can be sold in the market at a price of 130 per unit.

1. What is the per unit cost of product ABC according to the absorption costing approach, assuming that half of the relevant indirect costs are allocated with reference to the cost of direct labour and the other half with reference to the cost of running the machines? Would you recommend for the firm to produce ABC when calculating the cost of ABC in this way?

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