Jassie Ltd manufactures two types of baby cots, Jasmin and Cassie, and currently applies overhead on the basis of direct labour hours. Information about the companys products and budgets:

Jasmin				Cassie
Estimated Product Volume	2,000	units		Estimated Product Volume	3,000	units
Direct Material Cost	$ 45	per unit		Direct Material Cost	$ 60	per unit
Direct Labour Per Unit	3	hours	$22 p/hr	Direct Labour Per Unit	4	hours	$22 p/hr

Jassies overhead of $1,000,000 can be identified with three major activities:

Budget Overheads
Order processing	$250,000
Machine Processing	$660,000
Product Inspection	$90,000
Total	$1,000,000
Budget Direct Labour Hours	$18,000

These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively. Actual data relevant to these activities follow:

	Orders Processed	Machine Hours Worked	Inspection Hours
Jasmin	500	15,000	1,000
Cassie	1,200	18,000	4,000
Total	1,700	33,000	5,000

Profit has been decreasing, despite a significant factory upgrade with new, highly automated equipment being installed, which was expected to produce significant operating efficiencies.

Required:

1) Currently direct labour hours are used to apply overhead to production, calculate the unit manufacturing costs of the Jasmin and Cassie cots if the expected manufacturing volume is attained.

2) If activity-based costing could be used, calculate the unit manufacturing costs of the Jasmin and Cassie cots if the expected manufacturing volume is attained.

3) Compare the use of direct labour hours as an application base with activity-based costing.

(a) Has either product been over-costed or under-costed? Calculate the amount of the cost distortion for each product.

(b) Discuss and explain how the possible cost distortion and determination of selling prices may have contributed to the companys declining profit.