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Question 1. Product Cost/Pricing (Manufacturer) [20 marks] Subrail's Furniture Ltd (SFL) manufactures two models of recliner chairs. The company uses an absorption product costing system, which means that both variable and fixed overhead are included in the product cost. Cost estimates for the two models for the coming year are as follows: Super velvet model ($) Pure leather model ($) Direct material 240 390 230 230 Direct labor (10 hours @ $23 per hour) Manufacturing overhead* 150 150 Total cost per set 620 770 * The predetermined overhead rate is $15 per D/L hour. Each chair requires 10 hours of direct labour. Each Super Velvet chair requires 2 hours in Department ! and 8 hours in Department II. Each set of a Pure Leather chair requires 8 hours in Department 1 and 2 hours in Department II. The manufacturing overhead costs expected during the coming year in Departments I &ll are shown below: Department I Department II Variable overhead $12 per direct labour hour $6 per direct labour hour Fixed overhead $212 000 $212 000 The expected operating activity for the coming year is 37 500 direct labour hours in each department. Required: (a) Calculate the price of each chair assuming that SFL prices its products at absorption manufacturing cost plus 15 per cent. (4 marks) (b) Suppose that SFL was to use departmental overhead rates. Calculate the Department I and II predetermined overhead rates for the coming year. (4 marks) (c) Calculate the total absorption cost of each chair using the departmental overhead rates calculated in requirement (b) above. (4 marks) (d) Suppose that management sticks with its policy of setting prices equal to total absorption cost plus 15 per cent. Calculate the new price for each chair using the product costs developed in requirement (c) above. (4 marks) (e) Should SFL use plant-wide rate or departmental overhead rates? Explain which overhead rate would be a more relevant and justified cost base in the SFL case. (4 marks)