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Island Craze Publishing Ltd publishes and sells only two types of books. The first one is the Aristo. This book uses the best quality of paper and has a high demand. It is therefore manufactured in only eight large production runs. For this book, the firm is subject to various inspections from government departments and it undergoes various quality assurance checks. Production of the second book, the Brute, is completed in monthly runs, that is, twelve times a year. Unlike the Aristo, the Brute uses cheaper paper. It is also subject to fewer quality assurance checks and no monitoring from the government. Also, the production of Aristo requires far less machine hours than the Brute. The firm had always been adopting traditional methods for the absorption of overheads and absorption costing based on machine hours is normally applied for computation of overheads. However, given the rising competition in the book selling industry, the senior management has now become more concerned about cost cutting and increasing competitiveness. Since Activity Based Costing (ABC) for the absorption of overheads is becoming more and more popular, the management of the firm are considering whether the adoption of the ABC system would bring better results. The following cost and revenue information is available for the two books: 1. Aristo uses the better quality paper which costs Rs 4 per kg while for the Brute the cheaper quality paper costs half this amount. Each Brute book requires 200 g of paper while, given the higher demand and higher production, each Aristo book requires four times this quantity of paper. 2. The cost for printing ink amounts to Rs60 per litre. The Aristo requires only 100ml of printing ink while the Brute, requires thrice this quantity. 3. As regards machining time, the Aristo requires 12 minutes per book. Since the Brute is larger, it requires a total of 20 minutes per book. Running costs of machines, per hour, amount to Rs24. 4. The Aristo is normally sold at Rs 18.60 while a Brute costs Rs28. The following data is available for the three main overheads: Overheads Annual cost for next year(Rs) Property related costs 4,320,000 Quality assurance 1,336,000 Production set up costs 104,000 A total of 360 inspections will be required for the Aristo, while the Brute will be subject to inspections only 40 times. An annual production of 2,000,000 units is expected for the Aristo, to be completed in only 8 large production runs, whereas the twelve production runs for the Brute are expected to result in an approximate 20,000 units monthly. Required: (a) Using traditional absorption costing method, calculate the cost and profit per unit for the Aristo and the Brute (5 marks) (b) Using the Activity Based Costing (ABC) system, find the cost and profit per unit for each book (9 marks) (c) Explain the advantages and limitations of implementing an Activity Based Costing system in an organization. (6 marks). (d) Non-financial performance measures can provide management with incentives to work towards better long term performance. Explain the importance of non-financial performance indicators in the modern competitive business environment, supporting your discussion with relevant examples of such indicators. (10 marks)
