Tora automotive Inc. Tora Inc. is a new multinational automotive manufacturer headquartered in Aichi, Japan. The company manufacturers its own car seats while gets the remaining component parts from suppliers at the local level. The company uses a hybrid costing system that combines traditional absorption costing system as well as process costing system. A process costing system is used for assigning costs to identical units of car seats in batches employing a consistent process. A traditional absorption costing system is used to account for the manufacturing costs of the company's main car models; CLR, CLO, CLV and CLM. The company allocates total manufacturing overhead of $1,680,000 to individual models using a manufacturing overhead rate based on total direct labor cost. That is, the manufacturing overhead cost for each car model is determined by multiplying the direct labor cost of each car model by the manufacturing overhead rate. Part 1: The manufacturing cost of cars The president of the company Mr. Yukio Huwang has been showing concerns lately with respect to the profitability of CLM model. Mr. Yukio is thinking to drop CLM model from the company's product line due to its high manufacturing overhead costs exceeding $25,000 per car. He believes that pricing CLM above its full cost of nearly $51,000 would lead to a drop in the market share as competitive cars in the market with similar specifications are priced within the range of $42,000- $45,000. Mr. Yukio has hired a new financial controller Mr. Kane Hiroshi - who holds a Certified Management Accountant (C.M.A.) qualification - to assess the profitability of each car model before eliminating CLM model. On the first week of work. Mr. Kane was provided with the following table summarizing manufacturing overhead categories and their associated costs: Purchasing $ 72,000 Machine Setups for productions runs $ 92,500 Material Movements S 36.000 Machinery S 840,000 Design S 480,000 Inspection S 159,500 Total S 1.680.000 Mr. Kane also requested the Management and Cost Accounting Department to provide him with additional data related to the four models. Additional data summarizes the direct costs, cost drivers of the overhead categories and the number of units produced of each model: CLV 40 $180,000 $168,000 CLM 40 S540,000 $504,000 CLR CLO Units Produced 20 20 Direct Material Cost $90,000 $90,000 Direct Labor Cost S84,000 $84.000 Overhead Categories Purchase orders written 180 18 No. of production run setups 148 37 Material movements 600 120 Machine hours 10,500 3,500 Design hours 6,400 3,200 Inspection hours 10,500 3,500 126 74 360 28,000 16,000 28,000 36 111 120 28,000 6,400 28,000 After reviewing the information in the above tables, Mr. Kane was surprised to know that the company has been implementing the traditional costing system even though manufacturing overhead has been driven by several activities. Mr. Kane tried to talk Mr. Yukio out of dropping CLM by explaining that the current costing system of the company is inadequate. Mr. Kane further explained that CLM could be more profitable than what it seems under the traditional costing system. Mr. Kane advised the president to use a more accurate costing system that assigns overhead costs to activities and then assigns the costs to the car models based on each car model's usage of the activities. Mr. Yukio showed interest in the suggested method by Mr. Kane and subsequently asked him to prepare a report summarizing the cost per unit for each car model accordingly. Required: Assuming you are Mr. Kane: a) Prepare a report to Mr. Yukio that shows the calculations of the cost per unit for each car model under both the traditional absorption costing system and the suggested costing system. (20%) b) Comment on the differences in the unit cost for each model. (5%) c) Write your recommendations to Mr. Yukio on whether to discontinue CLM model based on the cost per unit determined by the suggested costing system. (5%) d) Lastly, explain how the new costing system suggested by Mr. Kane improves the accuracy of reported cost of individual models compared to the absorption costing system. (5%)