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XYZ Company produces two fishing boats: C and S. The company does not have detailed information on the cost incurred to manufacture both products. Recently, the company has incurred significant losses that they find difficult to explain and have decided to implement an activity-based costing (ABC) system to improve its cost evaluations. This year, the unit prices charged to customers was $24,900 for C and $32,900 for S. Production costs for each model of train are as follows:

C S

Direct material per unit $8,625 $12,750

Direct labour per unit $6,500 $8,200

The following are the costs incurred during the last month for the companys three categories of overhead costs:

Purchasing $ 6,750,000

Machine operating 3,750,000

Production Support 7,500,000

Total $ 18,000,000

Currently, overhead costs are applied to each model based on machine hours used. There are 120,000 machine hours available each month.

C S

Number of units produced by month 1,900 1,400

Number of purchase orders by month 5,750 5,500

Number of machine hours used to produce 1 unit 30 45

Number of employees 7,000 5,000

Required

a. Calculate the cost of producing each boat using the current costing system.

b. Calculate the cost of producing each boat using the new ABC system. Assume that Purchasing is charged out based on the number of purchase orders, Machine operating costs based on machine hours and production support on number of employees.

c. The company received an offer to supply 30 of the C unit at a selling price of $22,900 per unit. Should they accept the offer if management requires a 15% return on sales using both the traditional and ABC methods? Explain.

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