Silver Company Limited manufactures fruit sticks and sells three flavored products: Apple, Orange and Lemon in boxes. This year, for the first time, it is operating an activity-based costing system in parallel with its absorption costing system. The planned production costs and operating details for all the outputs for the year are as follows:

Products

Apple Orange Lemon

Number of boxes produced 600,000 500,000 800,000

Direct materials ($) 840,000 1,000,000 2,160,000

Direct labour ($) 200,000 400,000 300,000

Total machine hours 60,000 50,000 90,000

Number of purchase orders 90 40 110

Number of material requisitions 100 180 120

Number of production runs 160 200 80

Production overheads: $

Purchasing of materials 3,000,000

Issuing materials 1,200,000

Production set up 2,200,000

Running machinery 3,600,000

Required:

a. Calculate the production cost per box for each product for the year using the machine hour overhead absorption rate.

b. Calculate the production cost per box for each product for the year using activity-based costing.

c. Explain why activity-based costing is more preferable than traditional absorption costing. Comment on the production cost per box for each product calculated in (a) and (b) above if the company uses cost-plus method in setting selling prices of its products.