Question

Sharp Focus Technology Ltd (Sharp) manufactures and sells three models of camera. Sales revenue and direct costs for November of 2019 are shown as follows: Model Beginner   Intermediate Pro-level

Units produced and sold 400 200 100

Unit selling price $6,000 $15,000 $33,000 Direct materials $700,000 $1,600,000 $1,820,000 Direct labour $600,000     $750,000 $840,000 Machine hours consumed 300 90 60

Manufacturing overhead incurred in the month includes the following: Activity $ Engineering 300,000 Quality control 298,500 Machinery 751,500 Materials handling 300,000

-------------- 1,650,000.

The company adopts a simple costing system by allocating the manufacturing overhead based on the machine hours which are used to manufacture the three models.

Sharp’s CEO recently has learned that an activity-based costing system can provide more accurate cost information through analysing how the products use the activities during the operating processes. The following data were collected from operations in the quarter: Activity Cost driver Beginner Intermediate Pro-level Engineering No. of engineering hours 6 10 24 Quality control No. of inspection hours 36 120 204 Machinery No. of machine hours 300 90 60 Materials handling No. of orders 5 5 20

Required:

a ) Prepare a product line income statement showing the profitability % of each model: i using the current simple costing system ii using the activity-based costing system Show all workings clearly.

b) Compare and explain the differences in profitability of the three product models under both product costing systems. What are the implications for Sharp’s pricing strategy?

Answer 1