Stereo Sounds Pty Ltd manufactures radios for cars and trucks. The company produces in high volumes, four basic model radio sets used by manufacturers of large cars and trucks. Stereo Sounds Pty Ltd also has two deluxe radio hi-fi systems designed for use on expensive sports cars. The company costs all its products using a traditional volume-based costing system.

Lately, Stereo Sounds Pty Ltds profits have been declining. Foreign competitors have been undercutting the companys prices in three of its four major product lines, and its sales and market share have fallen significantly. In contrast, the companys deluxe radio hi-fi systems have been selling steadily, although in relatively small numbers, in spite of three recent price increases.

At a recent staff meeting, Stereo Sounds Pty Ltds managing director spoke about the issues faced by the company:

Our profits are going down the tube. It costs us $30 to manufacture our R1 radio set. Thats our best seller, with a volume last year of 20 000 units. But our main overseas competitor is selling essentially the same radio set for $28. They cant be making a profit. This is just another example of a foreign company dumping product on our shores. Its outrageous! Im going to write to my local MP. The government needs to do something about this!

On a bright note, thank goodness for our deluxe hi-fi systems. Our salespeople have to push these radios more and more. Take the DF model, for example. Its complicated to make and we dont sell many, but look at the profit margin. Those radio sets cost us $50 to make, and were selling them for $110 each!

Required:

1. Suggest any two (2) possible allocation basis for manufacturing overhead for Stereo Sounds Pty Ltds current costing system.

2. Comment on Stereo Sounds Pty Ltds current costing system. Are there any potential flaws or limitations in this costing approach? Include examples in your answer.

3. What are the factors contributing to the decline in profits for Stereo Sounds Pty Ltds four major product lines?

4. Recommend a more suitable costing system with justification for Stereo Sounds Pty Ltd. Include in your answer specific ways the recommended costing system can address the flaws you discussed in Q2 above.