A computer manufacturer produces three types of devices:mobile phones, tablets, and computers. For the production of these three devices you have the following information:
|
Phone |
Tablet |
Computer |
||
|
Material cost per unit |
£90 |
£140 |
£315 |
|
|
Direct labor hours per unit |
2 |
2.5 |
4 |
|
|
Budgeted units |
1,500,000 |
900,000 |
1,200,000 |
|
|
Labor cost per hour |
£8 |
|||
|
Overhead costs per annum |
||||
|
Utilities |
£20,000,000 |
|||
|
Rent |
£15,000,000 |
|||
|
Audit and legal |
£5,000,000 |
|||
|
Administrative staff |
£40,000,000 |
|||
|
Total |
£80,000,000 |
|||
ABC analysis suggested that overhead costs are distributed to the three products according to the table below:
|
Overheads |
Phone |
Tablet |
Computer |
|
Utilities |
£8,000,000 |
£5,000,000 |
£7,000,000 |
|
Rent |
£8,250,000 |
£2,250,000 |
£4,500,000 |
|
Audit and legal |
£2,900,000 |
£1,250,000 |
£850,000 |
|
Administrative staff |
£23,200,000 |
£6,000,000 |
£10,800,000 |
For each of the three products, the company aims at a different percentage for profit. Under the full absorption costing method and the targeted profit percentage, the prices of the three products should be:
|
Phone |
Tablet |
Computer |
|
|
Full costing price |
£170.69 |
£233.87 |
£435.67 |
- Calculate the aimed profit percentages for the three products and under the full absorption costing method, with overhead costs absorbed on the basis of direct labour hours.
- Use the profit percentages that you derived in (1) and calculate the prices of the three products under the ABC system.
- Recommend a cost system and include any changes that you would suggest to the pricing strategy of the computer company