Q.2 Stark Industries manufactures three products, X, Y and Z. Demand for products X and Y is relatively elastic whilst demand for product Z is relatively inelastic. Each product uses the same materials and the same type of direct labor but in different quantities. For many years, the company has been using full absorption costing and absorbing overheads on the basis of direct labor hours. Selling prices are then determined using cost plus pricing. This is common within this industry, with most competitors applying a standard mark-up. Budgeted production and sales volumes for X, Y and Z for the next year are 20,000 units, 16,000 units and 22,000 units respectively. The budgeted direct costs of the three products are shown below: Product X Y Z $ per unit $ per unit $ per unit Direct materials 25 28 22 Direct labor ($12 per hour) 30 36 24 In the next year, Stark Industries also expects to incur indirect production costs of $1,377,400 which are analyzed as follows: Cost pools $ Cost drivers Machine set up costs 280,000 Number of batches Material ordering costs 316,000 Number of purchase orders Machine running costs 420,000 Number of machine hours General facility costs 361,400 Number of machine hours -------- 1,377,400 -------- The following additional data relate to each product: Product X Y Z Batch size (units) 500 800 400 No of purchase orders per batch 4 5 4 Machine hours per unit 1.5 1.25 1.4 Stark Industries wants to boost sales revenue in order to increase profits but its capacity to do this is limited because of its use of cost plus pricing and the application of the standard mark- up. The finance director has suggested using activity based costing (ABC) instead of full absorption costing, since this will alter the cost of the products and may therefore enable a different price to be charged. Required: Calculate the budgeted full production cost per unit of each product using activity based costing. All workings should be to two decimal places.