Toowoomba Electrical Corporation manufactures electric motors for commercial use. The company produces three models called SM, DM, and HDM. The company uses a job costing system with manufacturing overhead applied based on direct labour hours. The system has been in place with little change for 30 years. Product costs and annual sales data are as follows: SM DM HDM Annual sales (units) 42,500 1,700 20,000 Product costs: Raw material $27.50 $47.75 $73.00 Direct labour $20.00 $35.00 $35.00 Manufacturing overhead $240.00 $350.00 $350.00 For the past 13 years, the companys pricing formula has been to set each products budgeted price at 110 per cent of its full product cost. Recently, however, the SM motor has come under increasing price pressure from offshore competitors. As a result, the price of the SM has been lowered to $210. The company CEO recently asked the financial controller, Why cant we compete with these other companies? Theyre selling motors just like our SM for $290. Thats only $2.50 more than our production cost. Are we really that inefficient? The financial controller responded by saying, I think this is due to an outmoded product costing system. As you may remember, I raised a red flag about our system when I came on board last year. But the decision was to keep our current system in place. In my opinion, our product costing system is distorting our product costs. Let me run a few numbers to demonstrate what I mean. Getting the CEOs go-ahead, the financial controller compiled the basic data needed to implement an Activity-Based Costing system. These data are displayed in the following table. The percentages are the proportion of each activity driver consumed by each product line. Product lines Activity Activity driver SM DM HDM Depreciation, machinery Machine time 40% 13% 47% Maintenance, machinery Machine time 40% 13% 47% Engineering Engineering hours 47% 6% 47% Inspection and repair of defects Engineering hours 47% 6% 47% Purchasing, receiving and shipping Material handling Number of material orders 47% 8% 45% Depreciation, taxes and insurance for factory Miscellaneous manufacturing overhead Factory space usage 42% 15% 43%4 Activity Costs Activity Estimated costs ($) Depreciation, machinery 2675000 Maintenance, machinery 175000 Engineering 650000 Inspection and repair of defects 475200 Purchasing, receiving and shipping 389600 Material handling 500000 Depreciation, taxes, and insurance for factory 600000 Miscellaneous manufacturing overhead 742500 Required Read the above scenario and write a report to the managing director discussing the following key areas: 1. How Toowoomba Electricals traditional product costing system distorts the product costs of the SM, DM, and HDMs and prices. Note: You are required to calculate per unit cost and target price. (7 marks) 2. Critically discuss general problems associated with Toowoomba Electricals traditional costing system and highlight any indicators that the current costing system is outdated and flawed. (14 marks) 3. Calculate per unit cost and target price for each product line using Activity-Based Costing (ABC) system. (Note: calculate the rate per activity driver to be used in the desired activity-based costing system. Round up to the nearest two decimal points). (21 marks) 4. Discuss the relevant costs and benefits of adopting Activity-Based Costing for Toowoomba Electrical Corporation. (14 marks) 5. Analyse and explain the differences in the product costs and target prices for each product line between the two alternative costing systems. Discuss likely reasons for the identified differences. (14 marks