QUESTION 3

Lim, Guesthouse Inc. (LGI) manufactures bedroom furniture in sets (a set includes a dresser, two queen-size beds, and one bedside table) for use in motels and hotels. LGI has three customer groups, which it calls the vibrant, quasar and lovely groups. The vibrant products are targeted to low-price motels that are looking for simple furniture, while the lovely furniture is targeted to the very best hotels. The quasar line is attractive to a variety of hotels and motels that appreciate the combination of quality and value. Currently there has been a small increase in the-cost of the vibrant lines, and an appreciable increase in demand in the lovely line, reflecting cyclical changes in the marketplace. Luxury hotels are now in more demand for business travellers. LGI wants to be able to respond to the increased production but worries about the increased production cost and about price setting as its mix of customers and production change. LGI has used a volume-based on direct labour-hours for some time. Direct labour cost is RM12 per hour.

	Budgeted Cost (RM)	Cost Driver
Materials handling	349,600	Number of parts
Product scheduling	160,000	Number of production orders
Setup labour	216,000	Number of setups
Automated machinery	1,750,000	Machine-hours
Fining	619,500	Direct labour-hours
Pack and ship	290,400	Number of orders shipped
	RM3,385,500
General, selling and admin. Costs	RM5,000,000

The budgeted production data for the three product lines follows.

Product lines	Vibrant	Quasar	Lovely
Units produced	RM15,000	5,000	500
Price	RM650	RM900	RM1,200
Direct materials cost per unit	RM80	RM50	RM110
Number of parts per unit	30	50	120
Direct labour-hours per units	4	5	7
Machine-hours per unit	3	7	15
Production orders	50	70	200
Production setups	20	50	50
Orders shipped	1,000	2,000	300
Number of inspections	2	6	14

2

Required:

1. Determine the production cost per set of each of three customer groups using activity based costing. (Round all rates to two decimal places).

(14 marks)

2. Determine the production cost for each of the three customer groups using LFIs current volume-based approach. (7 marks) 3. Compare the two approaches and discuss the strategic and competitive issues of using each of the two methods. (4 marks)