Mufasa Manufacturing produces two products in its Abu Dhabi plant: Sports Bicycle and Normal Bicycle. Since inception, Mufasa has used only one manufacturing overhead pool to accumulate costs. Manufacturing overhead has been allocated to products based on direct labor hours. Until recently, Mufasa was the sole producer of Normal Bicycle and was able to dictate the selling price. However, last year Munir Products began marketing a comparable product at a price below the standards costs developed by Mufasa. Market share has declined rapidly, and Mufasa must decide whether to meet the competitive price or to discontinue the product line. Recognizing that discontinuing the product line would place additional burden on its remaining product, Sports Bicycle. Mufasa is planning to use the activity-based costing (ABC) to determine if it would show a different cost structure for the two products. The three major indirect costs for manufacturing the products are purchase orders, power usage and setup costs and handling materials. A decision was made to separate the manufacturing department costs into three activity centers: 1) Inspection using number of purchase orders as the cost driver, 2) Fabricating using machine hours as the cost driver and 3) Assembly using number of setups as the cost driver. The annual budget before separation of manufacturing overhead is shown below in the table: Total Cost Product line Sports Bicycle Normal Bicycle Number of units 30,000 50,000 Direct labor 3 hours/unit 2 hours/unit Number of direct labor hours 190,000 hours Total Direct Labor AED 950,000 Direct Material AED 7/unit AED 6/unit Manufacturing Overhead AED 750,000 The cost structure after separation of overhead into activity pools is shown below: Inspection Fabricating Assembly Direct Labor 20% 30% 50% Direct Material 15% 45% 40% Manufacturing overhead 30% 35% 35% The activity base rates for the products are shown below: Activity Base Sports Bicycle Number of Purchase Orders 1,500 Normal Bicycle 4,000 Machine hours per unit 11 7 Number of setups 3,000 6,000 Questions: A. By allocating the manufacturing overhead based on direct labor hours, calculate the: 1- Total manufacturing budgeted cost of the manufacturing department (2 marks) 2- Cost per unit for Sports Bicycle product (3 marks) 3- Cost per unit for Normal Bicycle product (3 marks) B. After separation of manufacturing overhead into activity pools, compute the total manufacturing budgeted cost of the: 1- Inspection department (1 mark) 2- Fabricating department (1 mark) 3- Assembly department (1 mark) C. Using ABC system, calculate the cost per unit for: 1- Sports Bicycle (2.5 marks) 2- Normal Bicycle (2.5 marks) D. Discuss how a decision by Mufasa Manufacturing regarding the continued production of Sports Bicycle will be affected by the results of your calculations in requirement C. (2 marks) E. If Mufasa decides to moves to mass production and focuses on one product (Normal Bicycle) by using process costing system in highly automated process. Identify and explain any advantages of process costing. (2 marks)