Hard Drive Corporation (HDC) manufactures three types of disk drives, designated as Galaxy, Classic and Trendy for the computer industry. The company has been using a traditional, volume- based product costing system that allocates manufacturing overhead costs based on direct labour dollars. The average direct labour rate is $15 per hour.

Data relevant to the three products are as follows:

	Gallery Model	Classic Model	Trendy Model
Annual sales (units)	5,000	18,000	10,000
Actual current selling price per unit	$ 150.00	$ 234.00	$ 180.00
Raw material costs per unit	$ 18.00	$ 54.00	$ 36.00
Direct labour hour per unit	0.5	0.8	1.0

Manufacturing overhead budget (based on budgeted annual sales):
Machine setup	$ 6,500
Machinery	1,315,000
Inspection	625,000
Material handling	875,000
Engineering	204,750
Total	$ 3,026,250

HDCs pricing method has been to set a target price equal to 150% of full product cost. However, only the Classic model has been selling at its target selling price. HDC has been forced to lower the price of the Trendy model in order to get orders. In contrast, HDC has raised the price of the Galaxy model several times, but there has been no apparent loss of sales. HDC has been under increasing pressure to reduce the price even further on its Trendy model. In contrast, HDCscompetitors do not seem interested in the market for its Galaxy model. HDC apparently has this market to itself.

Required: (Show all your workings/ calculations for your answers.)

1. Show how HDCs predetermined overhead rate of $7.50 per direct labour dollar (or 750% of direct labour cost) was calculated. (2.5 marks)

2. Compute the product cost per unit for each of the three models based on the traditional method of allocating manufacturing overhead costs based on direct labour dollars. (5 marks)

3. Of the three models, which is the most profitable (in term of gross profit per unit)? Explain. (2 marks)

4. HDCs controller, Patricia Chan, recently attended a conference at which activity-based costing systems were discussed. She became convinced that such a system would help HDCs management to understand its product costs better. She got top managements approval to design an activity-based costing system, and an ABC project team was formed. In stage one of the ABC project, each of the overhead items listed in the overhead budget was placed into its own activity cost pool. Then a cost driver was identified for each activity cost pool. Finally, the ABC project team compiled data showing the percentage of each cost driver that was consumed by each of HDCs product lines. These data are summarized as follows:

Activity Cost Pool	Cost Driver	Galaxy Model	Classic Model	Trendy Model
Machine setup	Number of setups	55%	10%	35%
Machinery	Machine hours	25%	50%	25%
Inspection	Number of inspections	30%	55%	15%
Material handling	Raw material costs	6%	69%	25%
Engineering	Number of change orders	50%	30%	20%

4(i) Compute the product cost and target price per unit for each of the three models, based on an activity-based costing system and using the new data collected by the controller. Round off to the nearest cent. (8.5 marks)

4(II) By how much is the Galaxy model under-costed or over-costed under the current traditional costing system? Explain the reason for the difference in Galaxys product costs. (4 marks)

4(iii) Assume that you are HDCs controller, Patricia Chan. Write a memo to the CEO, Patrick Tan, to report your findings/ analysis on both the traditional, volume-based and activity-based costing system. You are to include the options available to the management as well as your recommendations in the memo. You can also comment on the situation HDC faced regarding the market for its products and the actions of its competitors. (6 marks)