70.2K

Verified Solution

Link Copied!

Bathalong, a manufacturer of small domestic electrical appliances, is situated in the Western Cape. Its market is competitive in terms of both price and new product innovation. As a result, product life cycles are short. Bathalong's managers are concerned about the reliability of its product costing system. It currently uses an absorption costing system which absorbs overheads based on budgeted direct labour hours. On this basis, the estimated cost of its latest product, a voice-activated electric kettle, is as follows: The firm's management accountant has suggested that more accurate product costs would be obtained if an activity-based costing (ABC) approach were used. He has collected the following information as a starting point for an ABC treatment of production overhead costs: Additional information: - Number of different components per kettle: 10 - Production line set-ups needed per annum: 6 - Dispatches required per annum: 500 - Budgeted production per annum: 10000 kettles. 1 Calculate the overhead allocation rates (OARS) using an ABC approach. 2 Estimate the cost of a voice kettle using an ABC approach. 3 Bathalong's finance director supports the proposal to introduce activitybased costing but argues that the company should consider all the costs involved in the development, production and marketing of the kettle. In addition to the above ABC costs, R300 000 has already been spent on research and development for the voice-activated electric kettle and he estimates that a further R50 000 will be spent on marketing the new product. There are no other costs attributable to the new product. Total sales over its life will be 10000 units per annum for the next 2 years. Based on prior experience, he knows that the firm will have to reduce the selling price of the kettle by 40% in its second year of sales to remain competitive. Calculate the price to be charged per unit for the voice-activated electric kettle in the first year of sales so that it will earn an overall 20% margin on sales over its two-year life - after covering all attributable costs outlined above. (8)

Answer & Explanation Solved by verified expert

See Answer