Reference no: EM132556855

Broadway Ltd manufactures two products, ALT500 and SDF450. Manufacturing overhead is allocated on the basis of direct labour hours. The anticipated manufacturing overhead for the upcoming accounting period is $560,000 and the expected direct labour hours are 16 000 hours.

Budgeted information for the two products follow:

ALT500:

Estimated production volume 3 000 units

Direct Material Cost $25 per unit

Direct labour per unit 2 hours at $12 per hour

SDF450:

Estimated production volume 4 000 units

Direct Material Cost $40 per unit

Direct labour per unit 2.5 hours at $12 per hour

Management is very concerned about declining profitability despite a healthy increase in sales volume. The CEO has heard about activity-based costing and has asked the management accounting team to collect relevant financial information relating to this costing system.

The management accounting team identified three major activities of manufacturing overhead: order processing ($105,000), machine processing ($392,000), and product inspection ($63,000). These activities are driven by the number of orders processed, machine hours worked and inspection hours, respectively.

Data relevant to these activities follow:

ALT500

240 Orders processed

11 000 Machine hours

2 000 Inspection hours

SDF450

160 orders

13500

Machine hours

4300 inspection hours

Total

400 orders

24500 machine hours

6300 inspection hours

Question 1: Assuming the company uses activity-based costing to apply manufacturing overheads to production, calculate the unit product costs of ALT500 and SDF450 each, if the expected production volume is attained.

Question 2:  The selling prices are based heavily on cost. If traditional costing is used, the product cost for ALT500 is $119, and for SDF450, $157.50. By comparing the product costs calculated in (i) to the costs using traditional costing, discuss the effect the difference in product cost could have on the company's profit.