Question 1 (15 marks) Susan Company manufactures two products, Product X and Product Y. The actual results for the current year regarding the two products are given as follows: Product X Product Y Direct materials $1,500,000 $550,000 Direct labor $500,000 $150,000 Unit selling price $35 $70 Number of units produced and sold 100,000 20,000 The company has traditionally used direct labor hours as the basis for calculating all manufacturing overheads. The direct labor cost is $50 per hour. The company is in the process of replacing the traditional costing system with activity-based costing (ABC) system. Data relating to the company's activity centres are given below for the current year: Activity cost pool Actual manufacturing overhead costs Activity cost driver Activity level Assembling costs Machining costs Set-up costs Purchasing costs Quality inspection costs Others (organization- sustaining costs) $390,000 732,000 300,000 80,400 118,000 524,600 Direct labor hours Machine hours Number of set-ups Number of purchase orders Inspection hours X ? 51,700 160 280 100 NA Y ? 9,300 440 120 900 NA Out of the total selling and administration expenses of $230,500, $23,000 and $134,000 can be directly traced to Product X and Product Y respectively. The remaining are organization-sustaining costs. Required: (a) Determine the product margins for Product X and Product Y under the company's traditional costing system. (5 marks) (b) Determine the product margins for Product X and Product Y under the company's activity-based costing system. (5 marks) (c) For the purpose of maximizing the long-term profitability of the company, the executive director is considering to divert all resources to only one product. Which costing system should he uses as the basis for decision, advise him which product should be dropped based on the assumption that all units produced can be fully absorbed by the market. Explain your answer with support by calculations. (5 marks) [Total for Question 1: 15 marks] 1