Trident Machining Products is discrete automotive component supplier. TMP has been approached by Bhusan Industries with a proposal to significantly increase production a part 'X' to a total annual quantity of 1,00,000 units. Bhusan believes that by increasing the volume of production of the part TMP should realize the benefits of economies of scale and hence should accept a lower price than the current Rs.6.20 per unit. Currently, TMP's gross margin of Part 'X' is 3.2%, computed as follows: Particulars Direct Materials Indirect manufacturing overheads (300% of direct materials) Total cost Selling price Gross margin Gross margin percentage Total Rs 1,50,000 Rs. 4,50,000 Rs 6,00,000 Per Unit Rs 1.50 Rs 4.50 Rs 6.00 Rs 6.20 Rs 0.20 3.2%. Attempted: 0/5 Part 'X' seems to be marginally profitable product. If additional volume of production of the part is to be added TMP management believes that the sales price must be increased not reduced as requested by Bhusan. The management of TMP sees this quoting situation as an excellent opportunity to examine the effectiveness of their traditional costing system versus an ABC system. TMP decided to implement a two- stage ABC system. A team consisting of accounting and engineering analysis has developed a process-based ABC system. For example, the total annual cost for the

Q3. Trident Machining Products is discrete automotive component supplier. TMP has been approached by Bhusan Industries with a proposal to significantly increase production a part ' X ' to a total annual quantity of 1,00,000 units. Bhusan believes that by increasing the volume of production of the part TMP should realize the benefits of economies of scale and hence should accept a lower price than the current Rs.6.20 per unit. Currently, TMP's gross margin of Part ' X ' is 3.2%, computed as follows: Part ' X ' seems to be marginally profitable product. If additional volume of production of the part is to be added TMP management believes that the sales price must be increased not reduced as requested by Bhusan. The management of TMP sees this quoting situation as an excellent opportunity to examine the effectiveness of their traditional costing system versus an ABC system. TMP decided to implement a two-stage ABC system. A team consisting of accnting and engineering analysis has developed a process-based ABC system. For example, the total annual cost for the quality assurance activity is estimated to be Rs 8,00,000 and the total quantity of the cost driver 'number of pieces scrapped" is estimated to be 10,000 . Thus, the cost per piece scrapped is Rs 80 . Total activities and cost per activity driver has been shown below: The consumption rate of cost drivers in relation to total production of 1,00,000 units is given below