Sunvalley Distributors Limited supplies numerous novelties in western Jamaican. The company's main competitor is Crazy Jim Limited. Currently, the entity is operating a traditional absorption costing system. Hence, for the period management budgeted labour hours and machine hours of 200,000 and 1,000,000 respectively. The machining cost for the same period was budgeted at $5,000,000. Meanwhile, material handling was estimated to be half of this amount. The production manager told the financial controller that production set ups were highly important in the process and for this reason, it has a budgeted cost that was four times material handling cost. However, when all items are completed they are taken off the conveyor belt and sent for inspection, this process consumed 20% of the total budgeted overhead costs already mentionedabove.

For the period, the following additional budgeted activity levels were presented to management:

Drivers

Activity levels

Material moves

500,000

Production set ups

500,000

Number of inspections

350,000

Direct wages are paid at a rate of $50 per hour, while, direct material cost on average $80 per kilogram. A sample of two products was selected by management for further analysis:

Ice cream cakes

fudge

Direct materials in kilograms

5

6

Direct labour hours

5

6

Machine hours

4

5

Material moves

2

2

Set ups

2

3

Inspections

1

1

Market research revealed that customers are willing to pay a maximum of $750 and $800 for the ice cream cake and fudge respectively. The entity applies a markup of 20% on the unit cost of each item.

Required:

1. Calculate the unit costs, selling price for each products and the target gap using the traditional method.[ 11 marks ]

Calculate the unit costs, selling price for each products and the target gap using the activity based method.