Oriental Motor Assembly Pte Ltd assembles three types of motorcycle at the same factory in Singapore: the 100cc Discover; the 250cc Pulsar and the 1000cc Punch. It sells the motorcycles throughout the world. In response to market pressures Oriental Motors has invested heavily in new manufacturing technology in recent years and, as a result, has significantly reduced the size of its workforce. Historically, the company has allocated all overhead costs using total direct labour hours, but is now considering introducing activity-based costing (ABC). Oriental Motors accountant has produced the following analysis. Discover Pulsar Punch Annual Output (Units) 2000 1600 400 Annual Direct labour hours 200,000 220,000 80,000 Selling price ($ per unit) 4,000 6,000 8,000 Raw material cost ($ per unit) 400 600 900 The three cost drivers that generate overheads are: Deliveries to retailers: the number of deliveries of motorcycles to retail showrooms Set-ups: the number of times the assembly line process is re-set to accommodate a production run of a different type of motorcycle. Purchase orders: the number of purchase orders. The annual cost driver volumes relating to each activity and for each type of motorcycle are as follows: Number of set-ups Discover Pulsar Punch Number of deliveries to retailers 100 80 70 35 40 25 Number of purchase orders 400 300 100 The annual overhead costs relating to these activities are as follows: Particulars Deliveries to retailers Set-up costs Purchase orders Amount ($) 2,400,000 6,000,000 3,600,000 All direct labour is paid at $5 per hour. The company holds no stocks. At a board meeting there was some concern over the introduction of activity-based costing. The finance director argued: "I very much doubt whether selling the Punch model is viable but I am not convinced that activity-based costing would tell us any more than the use of labour hours in assessing the viability of each product". The marketing director argued: "I am in the process of negotiating a major new contract with a motorcycle rental company for Discover model. For such a big order they will not pay our normal prices but we need to at least cover our incremental costs. I am not convinced that activity-based costing would achieve this as it merely averages costs for our entire production". The managing director argued: "I believe that activity-based costing would be an improvement but it still has its problems. For instance, if we carry out an activity many times surely we get better at it, and costs fall rather than remain constant. Similarly, some costs are fixed and do not vary either with labour hours or any other cost driver". The chairman argued: "I cannot see the problem. The overall profit for the company is the same no matter which method of allocating overheads we use. It seems to make no difference to me". REQUIRED: (a) Calculate the total profit on each of Oriental Motors three types of product using each of the following methods to attribute overheads: (0) The existing methods based upon labour hours. (6 MARKS) (II) Activity-based costing. (6 MARKS) (b) Write a report to the directors of Oriental Motors as its cost accountant. The report should: (0) Evaluate the labour hours and the activity-based costing methods in the circumstances of Oriental Motors. (4 MARKS) (II) Examine the implications of activity-based costing for Oriental Motors, and in so doing evaluate the issues raised by each of the directors. (4 MARKS) In drafting the report to directors, refer your calculations in requirement (a) above where appropriate. ([6 + 6] + [4 + 4]) = 20 marks Peer evaluation to count for 5 marks DO END OF ASSESSMENT