Waugh & Waugh Company Pty Ltd produce two models of petrol lawnmowers, Standard and Deluxe. Overhead was allocated based on direct labour hours. The following information was collected at the end of 2019.

Standard

Deluxe

Annual sales

37,000 units

7,000 units

Selling price

$550

$750

Direct material cost per unit

$90

$200

Direct labour cost per unit

$200

$250

Overhead cost per unit

$80

$90

Following an examination of the data above the marketing manager recommended that more emphasis should be placed on selling the Deluxe mower. The manufacturing manager disagreed and argued that there were problems in relation to the costing of the mowers. The management accountant agreed with the manufacturing manager and suggested that an activity based costing system should be installed.

The general manager asked the management accountant to recalculate the product costs using ABC techniques. The management accountant subsequently collected the following information.

Overhead activity

Overhead cost

Cost driver

Standard

Deluxe

Setups

$90,000

Number of setups

25 setups

20 setups

Machining

$2,000,000

Machine hours

70,000 hours

30,000 hours

Engineering

$900,000

Engineering hours

35,000 hours

25,000 hours

Packing

$604,000

Packing orders

30,000 orders

6,000 orders

Required:

(a)Using the activity based costing data calculate the overhead cost per unit for the two mower product lines.

(b)Calculate the contribution margin per unit generated by the two mowers under theconventional costing and activity based costing approaches.

(c)Based on the answers in part b), write brief note to the general manager explaining the differences in the contribution margins under the two costing approaches and evaluating the suggestion of the marketing manager to switch emphasis to the Deluxe model.