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	2000	units	estimated product volume	3000	units
direct material cost	$45	per unit	direct material cost	$60	per unit
direct labor per unit	3	hours	direct labor per unit	4	hourd	$22p/hr

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

budget overhead
order processing		250000
machine processing		660000
product inspectiom		9000
total		1000000
budget direct labor hours		18000

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

	order processed	machine hours worked	inspection hours
jasmin	500	15000	1000
cassie	1200	18000	4000
total	1700	33000	5000

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.