Management Accounting - It would be highly appreciated if someone could aid me in approaching this problem.

TuTu Ltd. is a global manufacturer of engines for trucks. Because of high quality of engines, TuTu has enjoyed a decent profit margin for the past fifteen years. Due to the growing environmental concerns, TuTu expanded its core product market of traditional engines (TA-01) to include two types of engines (HB-02 and ET-03) for hybrid and electric trucks in 2016. The firm believes that the two new products have great profit potential and its competition of traditional engines may become more intense in 5 years. TuTu was most excited about entering the market for engines for electric trucks as it experienced a strong demand for ET-03. Few competitors can compete with TuTu in this market. TuTu believes that excellent quality reputation and first-mover are its competitive advantage in this new market. Although current volumes are relatively small, TuTu plans to expand this product to reach three times the current volume since there is substantial market potential for this product. However, in the beginning of 2017, TuTu was surprised of a big drop of profit margin shown in the 2016 income statement. Although the demand for traditional engines is stable, CFO of TuTu, Grace Rizzo thinks that it might have to lower prices of TA-01 by 5% or more to increase sales and stay competitive. The following table provides key information about the product lines: TUTU LTD. Income Statement (in $ millions) Year Ended December 31, 2016 TA-01 HB-02 ET-03 Sales $880 $495 $262 Total $1,637 Direct costs: Direct materials R 1 120 26 Direct labour 40 10 ? ? 360 90 1,098 Manufacturing overhead Net Income 89 The firm allocates this overhead using direct labour cost used by each product. Tutu's management realizes that moving to engines for electric trucks is a major shift in their product and market focus. Moreover, they know that factory personnel have complained about the increased coordination required for producing different types of engines; for example, more parts need inspection and more effort has spent on inventory control. Ryan Walters, Tutu's director of cost management, has been learned a product-costing method called activity-based costing and questioning the accuracy of the current product cost system. Thus, management wants Ryan to conduct a detailed study of product costs. Analyzing the overhead, Ryan discovers the following information: Activity Cost (in millions) Labour related $315 Machine related 372 Production order First part inspection Inventory management Receiving and shipping General administration Total $1,098 Ryan decides to settle on forming five pools and allocate costs of each cost pool to products as follows: 1. Labour-related costs, allocated to products using labour cost. 2. Machine-related costs, allocated to products using machine hours. 3. Costs related to executing a production order (this would include first part inspections), allocated using the number of batches. 4. Costs related to inventory management, receiving, and shipping, allocated using the number of receiving transactions. 5. General administration will be equally allocated to three product lines. Ryan collects the following operation data: TA-01 HB-02 ET-03 Sales volume (units) 100,000 45,000 12,000 machine hour/unit 0.16 0.5 # of parts/unit # of batches/product line - 2 15 40 6 20 110 20 15 200 # of receiving transactions/product line Required a. Using the current allocation system, calculate the unit product cost of each product line and complete the income statement. b. Based on Ryan's approach (Activity Based Costing), allocate costs of five cost pool to each product line and determine the product cost per unit for each product line. C. Evaluate the profitability of these three product lines. Do you agree with TuTu management observations that the product, ET-03, is the most profitable product. If you disagree with TUTU management, explain why your evaluation the profitability of three products lines is more accurate. d. What actions would you recommend for TuTu's management? CGA-Canada