Please help me with my Managerial Accounting questions with necessary calculations, thank you!

Question 5 - Activity-Based Costing andManagement [20Marks]

Opsonin Inc manufactures three products for the pharmaceuticals industry:

productP : annual sales, 8000units.

productQ : annual sales, 15 000units.

productR : annual sales, 4000units.

The company uses a traditional, volume-based product costing system with manufacturing overhead applied on the basis of direct labour dollars. The product costs have been calculatedasfollows:

Product P

Product Q

Product R

Raw material

$35.00

$52.50

$17.50

Direct labour

16.00 (0.8 hr $20)

12.00 (0.6 hr $20)

8.00 (0.4 hr $20)

Manufacturing

140.00($16 875%)

105.00($12 875%)

70.00($8 875%)

overhead*

Total product cost

$191.00

$169.50

$95.50

*Manufacturing overhead budget:

Machinery

$1 225 000

Machine setup

5 250

Inspection

525 000

Material handling

875 000

Engineering

344 750

Total

$2 975 000

Opsonin Inc's pricing method has been to set a budgeted setting price equal to 150 per cent of full product cost. However, only the Product Q have been selling at their budgeted price. The budgeted and actual current prices for all three products are the following:

Product P

Product Q

Product R

Product cost

$191.00

$169.50

$ 95.50

Budgeted price

286.50

254.25

143.25

Actual current selling price

213.00

254.25

200.00

Opsonin Inc has been forced to lower the price of product P in order to get orders. In contrast, Opsonin Inc has raised the price of product R several times, but there has been no apparent loss of sales. Opsonin Inc has been under increasing pressure to reduce the price even further on gismos. In contrast, Opsonin Inc's competitors do not seem to be interested in the market for Product R. Opsonin Inc apparently has this market to itself.

Required:

1.Is product P the company's least profitable product? Explainyouranswer. [1Marks]

2.Is product R a profitable product for Opsonin Ltd? Explain youranswer. [1Marks]

3.CommentonthereactionsofOpsoninInc'scompetitorstothefirm'spricingstrategy.Whatdangers does OpsoninIncface? [2Marks]

4.Opsonin Inc's financial controller, Obrien Sally, recently attended a conference at which activity-based costing systems were discussed. She became convinced that such a system would help Opsonin Inc's management to understand its product costs better. She obtained top management's approval to design an activity-based costing system, and an ABC project team was formed. In Stage 1 of the ABC project, each of the overhead items listed in the overhead budget was placed into its own activity cost pool. Then an activity driver was identified for each activity cost pool. Finally, the ABC project team compiled data showing the percentage of each activity driver that was consumed by each of Opsonin Inc's product lines. These data are summarised asfollows:

Activity cost pool

Activity driver

product P

roduct Q

product R

Machinery

Machine hours

25%

50%

25%

Machine setup

Number of setups

20%

30%

50%

Inspection

Number of inspections

15%

45%

40%

Material handling

Raw material costs

25%

69%

6%

Engineering

Number of change orders

35%

10%

55%

Show how the financial controller determined the percentages given above for raw material costs. (Round to the nearest wholepercent.) [4Marks]

5.Develop product costs for the three products on the basis of a simple activity-based product costing system. (Round to the nearestcent.) [3Marks]

6.Calculate a budgeted price for each product, using Opsonin Inc's pricing formula. Compare the new budgeted prices with the current actual selling prices and previously reported productcosts. [2Marks]

7.Refer to the new budgeted prices for Opsonin Inc's three products, based on the new activity- based costing system. Write an memo to the company managing director commenting on the situation Opsonin Inc has been facing regarding the market for itsproducts and the actions of its competitors. Discuss the strategic options available to management. What do you recommend,andwhy? [5Marks]

8.Refer to the product costs developed in requirement 5. Prepare an table showing how Opsonin Inc's traditional, volume-based product costing system distorts the product costs of product P, QandR. [2Marks]

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