Question 3-Activity Based Costing Duplex Ltd manufactures two products, the Regular and the Supreme. The Regular has been produced and sold for some years, and although it is a well-established brand it has been losing market share in recent years to cheaper products from competitors. The Supreme, on the other hand, is a new product which was introduced about six months ago. Duplex Ltd is excited about the Supreme, as it has been well received by the market and sales have increased steadily since its launch. The Supreme is seen as a future replacement for the Regular, as it is made of modern lightweight material and includes advanced technological features. Monthly cost, production and sales data relating to the products are as follows: Supreme 180.00 Regular Direct material cost per unit Direct labour cost per unit Total direct costs per unit 200.00 60.00 40.00 220.00 260.00 Direct labour hours per unit Selling price per unit Monthly sales units 3.0 hours 2.0 hours 992.00 736.00 500 units 800 units At present the company uses a traditional method of overhead absorption. Manufacturing overheads amount to 372,000 per month, and are absorbed by the two products on the basis of direct labour hours. The company uses a cost-plus method of pricing, with prices for both products being based on the full production cost per unit, plus 60 %. The company also employs a just-in-time inventory policy, so that there is no monthly opening or closing inventories of WIP or finished goods. Duplex Ltd is planning to introduce an activity-based costing (ABC) system. The company has identified the activities which are required each month to produce the sales volumes of the two products, as indicated above, and has also determined the overhead activity cost pools and activity cost drivers for each cost pool. The results of this analysis are presented below: Total Overhead Cost (E's) Cost Driver 73,928 No. of set-ups Machine hours Total number Activity Setting-up machinery Machining Assembly Quality Control 40 141,120 2,520 27,838 No. of components Inspection hours 111,352 45,600 1,200 372,000 Activity cost driver units required by the two products are: Cost Driver Total number Regular Supreme No. of set-ups 40 12 28 No. of machine hours 2,520 775 1,745 No. of components No. of inspection hours 19,338 27,838 1,200 8500 370 830 P.T.O. for 'Required' section.... Required: ques (a) Calculate the full production cost of a Regular and a Supreme, using the traditional method od overhead cost absorption. (6 Marks) (b) Calculate the full production cost per unit of a Regular and a Supreme, using ABC to determine the production overheads absorbed by the two products. Also calculate the new selling prices of both products if the same percentage mark-up is applied. (14 Marks) (c) Do you think that Duplex Ltd should stop production of the Regular and produce only Supremes in future? Explain briefly why this might or might not be a good idea, and set out any actions that the company should take before making the final decision. (5 Marks) (Total: 25 Marks) Page 6 of 13