Pens Ltd manufactures two types of writing pen - The Simple and the Sleek (the Sleek being a higher quality item). Both products use similar parts but in different quantities. They also differ in the amount of work needed in the production, selling and billing process. They are both made in batches (large batches for Simple and small ones for Sleeks). Each new batch requires that the production facilities are"set-up".

Simple:

Annual production and sales (units) 7 ,500;

Sales price per unit $50; Batch size (units) 1,000;

Direct labour time per unit (hours) 2;

Direct labour rate per hour $9;

Direct material cost per unit $15;

Number of special parts per unit 2;

Number of setups per batch 1;

Number of separate material issues from stores per batch 1;

Number of sales invoices issued per year 50;

Sleek:

Annual production and sales (units) 10,000;

Sales price per unit $95;

Batch size (units) 200;

Direct labour time per unit (hours) 4;

Direct labour rate per hour $9;

Direct material cost per unit $20;

Number of special parts per unit 4;

Number of setups per batch 2;

Number of separate material issues from stores per batch 1;

Number of sales invoices issued per year 250

In recent months, Pens Ltd has been considering persuading customers who buy the Simple to purchase the Sleek instead. An analysis of overhead costs for the company has provided the following information:

Set-up cost 107 ,500 (cost driver: Number of set-ups);

Special part handling cost 23,750 (cost driver: number of special parts);

Customer invoicing cost 90,000 (cost driver: number of invoices);

Material handling cost 115,000 (cost driver: number of batches);

Other overheads 110,000 (cost driver: Labour hours)

Required:

Calculate the profit per unit and the return on sales for both products using:

1. The traditional absorption method(on a direct-labour-hour basis)

2. The activity based costing method.