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Q uestion 4 (Activity Based Costing) Games Forever Ltd (GFL), manufactures two games controllers. The two products are: the affordable 'BASE' and the advanced 'SUPER'. The home market for both products is very competitive. In recent years, the demand for the SUPER has been rising, and demand for the BASE has been falling. GFL currently uses traditional absorption costing and target pricing in order to try to meet pricing pressures. The company needs to make a gross profit of 32% to satisfy the requirements of the shareholders as well. Budgeted information for both controllers, based upon last year's selling prices and using the absorption costing system, is as follows: Selling price per unit Material usage per unit Labour per unit Production overheads per unit Total production cost per unit Profit per unit 0.5 0.4 kg hrs BASE 65.28 15.00 12.00 19.37 46.37 18.91 0.8 0.65 kg hrs SUPER 124.65 24.00 18.00 38.74 80.74 43.91 The board of directors have been investigating alternative costing systems to help in their need for competitiveness. The management accounting team have carried out in-depth analysis and have prepared the following data: Machining costs Set up costs Store movement costs Total overhead 799,600 Cost Drivers Machine hours Number of batches Number of movements The production team collected the following data: Cost driver Information Budgeted production (units) Number of batches Number of store movements Number of machine hours/ unit Required: BASE 110,000 220 1500 1 SUPER 45,000 600 1000 2 a) Calculate the total cost per unit, and the profit per unit, for each product, using Activity Based Costing (ABC). You should assume that the directors would not immediately change the prices charged to customers. They would review prices after the marketing department has conducted further market research. (21 marks) b) Based upon the information now known from your calculations in (a) above and assuming that a gross profit margin of 32% would be applied to the revised ABC- based costing, explain why GFL could now compete in the market where the competitions' prices, as established from the marketing research. This research shows that the competitor prices for the BASE equivalent is E63.60 and the SUPER equivalent sells for El 30.50. (9 marks) c) GFL is launching a new controller to enhance the piloting experience of drones, an entirely new market for the company. They do not anticipate any competition because their drone controller is the first to deploy artificial intelligence and GPS positioning based upon the SpaceX satellite system. Discuss the most appropriate pricing strategy for the new drone controller, considering Ansoffs matrix and Porter's 5 forces theory as they relate to the short, medium, and longer terms. (10 marks) (Total 40 marks)