Question 2. HappySummer Ltd produces two types of air conditioners. The first type, named FastCold 100, is based on a more advanced technology than the second type, named Frozen99. The new technology of FastCold 100 reduces the maintenance costs incurred by the customer by 20%. The company currently adopts a traditional costing system using direct labour hours to absorb all overheads into products. Details of production volumes and costs for the year are as follows: Product Volume (unit) Direct Material Cost per Unit Direct Labour Cost per Unit Direct Labour Cost per Hour () () () FastCold100 800 120 40 20 Frozen99 800 120 60 20 Activity Annual cost Machine set up 38,000 The management accountant proposes the introduction of an activity-based costing (ABC) system with the following overhead costs and drivers. Annual driver for Frozen99 180 set ups Annual driver for FastCold 100 200 set ups Production 36,000 scheduling 100 production runs 80 production runs Quality control 90,000 164,000 120 inspections 60 inspections Total overhead HappySummer Ltd usually adds 15% to the cost of each product to arrive at selling price. Required: (a) Calculate the unit cost and selling price of each product (b) (c) assuming a traditional costing system with direct labour hours as the only allocation base. Calculate the unit cost and selling price for each product using the new ABC system. Discuss your results from (a) and (b) above specifically commenting on the implications for pricing of the two products.