Question 2 (10 marks) PumpTech produces water pumps for use in regular drainage need situations. Recently PumpTech introduced a High Capacity (HC) model, which is intended for use in extreme and more difficult high flood situations. Since its introduction, sales of the HC model have been strong but overall company profits have declined steadily. The company currently assigns manufacturing overheads to products based on direct labour hours. Material and labour costs for last month were as follows: Regular model Direct materials $280,000 Direct labour $330,000 High capacity (HC) model Total $240,000 $520,000 $170,000 $500,000 Last month manufacturing overheads were $400,000 based on the production of 7,200 units of the Regular model and 2,400 units of the HC model. Each regular model uses 1.5 hours of direct labour while each HC model uses 1 hour. Company management thinks that the current method of costing may not be accurate and wonders if using activity-based costing (ABC) could help to cost its water pumps more accurately. Company management recently hired a consultant who discovered that overhead costs could be separated into three core activities. These activities, and their costs and cost drivers for last month, are summarised in the table below: Activity Setup Quality Control Shipping Total Usage of cost driver Cost Cost driver Regular HC Total $260,000 Number of production runs 140 60 200 $50,000 Number of tests 15 35 50 $90,000 Number of shipments 200 100 300 $400,000 Required: 1. Compute the unit costs of each model if the overheads are assigned using direct labour hours. (2 marks) 2. Compute the unit cost of each model if the overheads are assigned based on the ABC method. (3 marks) 3. Should PumpTech discontinue the Regular model? In answering this question ensure that you discuss the implications of the ABC method and compare it to the direct labour hours method