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

25,000 units

4,000 units

Selling price

$450

$650

Direct material cost perunit

$80

$100

Direct labour cost per unit

$100

$150

Overhead cost per unit

$80

$80

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 ofthe mowers. The management accountant agreed with the manufacturing manager and suggested that an activity based costing system should be installed.

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

Overhead activity

Overheadcost

Cost driver

Standard

Deluxe

Setups

$100,000

Number of setups

15 setups

10 setups

Machining

$1,000,000

Machine hours

60,000 hours

40,000 hours

Engineering

$800,000

Engineering hours

25,000 hours

15,000 hours

Packing

$420,000

Packing orders

20,000 orders

5,000 orders

Required:

(a)Using the activity based costing data calculate the overhead cost per unit for the two mower product lines. (5 marks)

(b)Calculate the contribution margin per unit generated by the two mowers under theconventional costing and activity based costing approaches. (2 marks)

(c)Based on the answers in part b), how would you do a 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. (5 marks)