Question

A manufacturing business makes a product in two models. M1 and M2. Details of the two products are as follows:

                                                                                                             M1                           M2

Annual sales                                                                                  8,000 units               8,000 units

Number of sales orders                                                                         60                           250

Sales price per unit                                                                              ₵54                          ₵73

Direct material cost per unit                                                                 ₵11                           ₵21

Direct labour hours per unit                                                                2.0 hours                2.5 units

Direct labour rate per hour                                                                     ₵8                           ₵8

Special parts per unit                                                                              2                                8

Production batch size                                                                        2,000 units              100 units

Set-ups per batch                                                                                    1                               3

Production batch size                                                                               1                               1

Setups per batch:                                            ₵                                          cost driver

Issues of material for each batch                97,600                                   number of setups

Overhead analysis                                      42,000                                   number of batches

Setup costs                                                  50,000                                  number of special parts

Material handling costs                                31,000                                   number of sales orders

Special part handling costs                       108,000                                   direct labour hours

Customer invoicing costs                           328,600

A customer has indicated an interest in placing a large order for either model M1 or M2, and the sales manager wished to try to sell the higher-priced model M2.

Required

1. Calculate the profit using traditional absorption costing
2. calculate the profit per unit for each model using ABC
3. Advice the sales manager on the best method and why?

Answer 1