GPS Tech manufactures compact lightweight (LW) GPS devices for use when hiking or undertaking outdoor activities...

 

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GPS Tech manufactures compact lightweight (LW) GPS devices for use when hiking or undertaking outdoor activities in remote locations. Recently it introduced a heavy duty (HD) GPS device designed for more demanding outdoor situations Since its introduction, sales of the HD model have been strong but overall company profits have declined steadily. The company currently allocates manufacturing overheads to GPS devices based on direct labour cost. Material and labour costs for last month to manufacture GPS devices were as follows: Direct materials Direct labour LW $280,000 $330,000 Activity Setup Quality Control Shipping Total HD $240,000 $170,000 Last month manufacturing overheads were $400,000 based on the production of 7,200 units of the LW device and 2,400 units of the HD device. The CEO at GPS Tech feels that the current method of costing may not be accurate and wonders if using activity-based costing (ABC) could help to cost GPS devices more accurately. The CEO recently contracted a consultant for advice who discovered that overhead costs could be separated into three core activities. These activities, and their costs and cost drivers for last month, are summarised in the table below: Cost Cost driver $260,000 Number of production runs $50,000 Number of tests $90,000 Number of shipments $400,000 Total $520,000 $500,000 Usage of cost driver HD LW 140 15 200 60 35 100 Total 200 50 300 Required: 1. Compute the unit cost of each GPS device if the overheads are allocated using direct labour cost. 2. Compute the unit cost of each GPS device if the overheads are allocated based (4 marks) on ABC. (4 marks) 3. Should GPS Tech discontinue either the LW or HD device? In answering this question ensure that you discuss the implications of using ABC versus direct labour cost to allocate manufacturing overheads. (8 marks) GPS Tech manufactures compact lightweight (LW) GPS devices for use when hiking or undertaking outdoor activities in remote locations. Recently it introduced a heavy duty (HD) GPS device designed for more demanding outdoor situations Since its introduction, sales of the HD model have been strong but overall company profits have declined steadily. The company currently allocates manufacturing overheads to GPS devices based on direct labour cost. Material and labour costs for last month to manufacture GPS devices were as follows: Direct materials Direct labour LW $280,000 $330,000 Activity Setup Quality Control Shipping Total HD $240,000 $170,000 Last month manufacturing overheads were $400,000 based on the production of 7,200 units of the LW device and 2,400 units of the HD device. The CEO at GPS Tech feels that the current method of costing may not be accurate and wonders if using activity-based costing (ABC) could help to cost GPS devices more accurately. The CEO recently contracted a consultant for advice who discovered that overhead costs could be separated into three core activities. These activities, and their costs and cost drivers for last month, are summarised in the table below: Cost Cost driver $260,000 Number of production runs $50,000 Number of tests $90,000 Number of shipments $400,000 Total $520,000 $500,000 Usage of cost driver HD LW 140 15 200 60 35 100 Total 200 50 300 Required: 1. Compute the unit cost of each GPS device if the overheads are allocated using direct labour cost. 2. Compute the unit cost of each GPS device if the overheads are allocated based (4 marks) on ABC. (4 marks) 3. Should GPS Tech discontinue either the LW or HD device? In answering this question ensure that you discuss the implications of using ABC versus direct labour cost to allocate manufacturing overheads. (8 marks)

Answer rating: 100% (QA)

3 The decision to discontinue the LW or HD device should not be based solely on the unit cost c... View the full answer