Locket Storage Ltd manufactures two types of storage cabinetsDeluxe and Executiveand applies manufacturing overhead to all units at the rate of $80 per machine hour. Production information follows:

Deluxe Executive

Direct material cost 35 60

Direct labour cost 20 20

Budgeted Volume 8000 15000

The management accountant, who is studying activity-based costing, has determined that the firm's overhead can be identified with three activities: manufacturing setups, machine processing and product shipping. Data on the number of setups, machine hours and outgoing shipments, which are the activities' three respective cost drivers, follow:

Deluxe Executive Total

Setups 50 30 80

Machine Hours 16000 22500 38500

Outgoing shipments 100 75 175

The firm's total overhead of $3 080 000 is subdivided as follows: manufacturing setups, $672 000; machine processing, $1 848 000; and product shipping, $560 000.

Required:

(a) Calculate the unit manufacturing cost of Deluxe and Executive cabinets by using the company's current overhead costing procedures (2 marks)

(b) Calculate the unit manufacturing cost of Deluxe and Executive cabinets by using activity-based costing (6 marks)

(c) Is the cost of the Deluxe cabinet overstated or understated (i.e. distorted) by the use of machine hours to allocate total manufacturing overhead to production? If so, by how much? (Max 100 words, 2 marks)

(d) Assume that the current selling price of a Deluxe cabinet is $260 and the marketing manager is contemplating a $30 discount to stimulate sales. Is this discount advisable? Briefly discuss (Max 150 words, 3 marks).