Question 3 (15 marks) FlightPath produces drones for use in normal environmental conditions. Recently it introduced a special model, which is intended for use in extreme and more difficult environments. Since its introduction, sales of the special 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: Direct materials Normal model $280,000 $330,000 Special model $240,000 $170,000 Total $520,000 $500,000 Direct labour Last month manufacturing overheads were $400,000 based on the production of 7,200 units of the Normal model and 2,400 units of the Special model. Each Normal model uses 1.5 hours of direct labour while each Special 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 products 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: Cost Cost driver Usage of cost driver Normal Special Total 140 60 200 Activity Setup Quality Control Shipping Total 15 35 50 $260,000 Number of production runs $50,000 Number of tests $90,000 Number of shipments $400,000 200 100 300 Required: 1. Compute the unit costs of each model if the overheads are assigned using direct labour hours. (3 marks) 2. Compute the unit cost of each model if the overheads are assigned based on the ABC method. (5 marks) 3. Should FlightPath discontinue the Special model? In answering this question ensure that you discuss the implications of the ABC method and compare it to the direct labour hours method. (7 marks)