Stewart plc sells and services photocopying machines. Its sales department sells the machines and consumables, including ink and paper, and its service department provides an after-sales service to its customers. The after-sales service includes planned maintenance of the machine and repairs in the event of a machine breakdown. Service department customers are charged an amount per copy that differs depending on the size of the machine.

The company's existing costing system uses a single overhead rate, based on total sales revenue from copy charges, to charge the cost of the service department's support activities to each size of machine. The service manager has suggested that the copy charges should more accurately reflect the costs involved. The company's accountant has decided to implement an activity-based costing system and has obtained the following information about the support activities of the service department:

Activity - Cost driver - Overheads per annum

Customer account handling - Number of customers =126,000

Planned maintenance scheduling - Number of planned maintenance visits =480,000

Unplanned maintenance scheduling - Number of unplanned maintenance visits =147,000

Spare part procurement - Number of purchase orders =243,000

Other overheads - Number of machines =602,400

Total overheads =1,598,400

The following data have also been collected for each machine size

• small photocopiers;

Charge per copy 0.03

Average number of copies per machine per year 60,000

Number of machines 300

Planned maintenance visits per machine per year 4

Unplanned maintenance visits per machine per year 1

Total number of purchase orders per year 500

Cost of parts per maintenance visit 100

Labour cost per maintenance visit 60

• Medium photocopiers

Charge per copy 0.04

Average number of copies per machine per year 120,000

Number of machines 800

Planned maintenance visits per machine per year 6

Unplanned maintenance visits per machine per year 1

Total number of purchase orders per year 1,200

Cost of parts per maintenance visit 300

Labour cost per maintenance visit 80

• large photocopiers

Charge per copy 0.05

Average number of copies per machine per year 180,000

Number of machines 500

Planned maintenance visits per machine per year 12

Unplanned maintenance visits per machine per year 2

Total number of purchase orders per year 1,000

Cost of parts per maintenance visit 400

Labour cost per maintenance visit 100

Each customer has a service contract for two machines on average.

Required:

(a) Calculate the annual profit per machine for each of the three sizes of machine, including parts and labour costs and using the current basis for charging the costs of support activities to machines. (6 marks)

(b) Calculate the annual profit per machine for each of the three sizes of machine, including parts and labour costs and using activity-based costing to charge the cost of support activities to machines. (15 marks)

(c) Explain the potential benefits to the company of using an activity-based costing system.