James Dovel is the founder and owner of Logan Technology (LT), a business that manufactures components for Air Pollution Monitoring Devices (APMD). LT uses high-tech equipment and employs a highly-skilled labor force, including experts with knowledge of air monitoring technology. All LT’s buildings and equipment are leased, with the company owning minimal non-current assets.

Since it was first established two years ago, LT has been operating at a loss. Total LT losses for the last financial year were $1,310,000.

LT manufactures eight (8) products and currently has one customer, based overseas. The customer sells APMDs to factories and city authorities.

The ABC costing information provided below is based on LT’s two (2) most popular products (LS240 and LSX80) information is for the last financial year.

Activities	Driver	Total activity costs $	LS240activity usage	LSX80activity usage	Totalusage
Equipment adjustments	Machine hours	864,000	200	600	800
Product inspections	Inspection hours	660,000	800	1,600	2,400
Total allocated manufacturing overheads for the two (2) products		1,524,000

Notes:

• The two products have similar volumes.
• Total common support costs that have no cost driver were $480,000.
• Total LT manufacturing overheads (including common costs) were $2,227,000.
• Manufacturing overheads are the only overheads incurred by LT.
• Any increase in demand for LT’s products is estimated to have a maximum increase in total manufacturing overheads of 10%.

	LS240 $	LSX80 $	Total $	Gross margin
Gross margin	420,000	340,000	760,000	40%

Required:

1. Calculate the product costs and product profitability for LS240 and LSX80 using the activity-based costing (ABC) principles.
2. Advise if the ABC principles should be extended to all LT’s products.
3. Discuss how the ABC calculations completed in (a) above could lead to profit improvements for LT.

Answer rating: 100% (QA)

a Product costs and product profitability for LS240 and LSX80 Prod... View the full answer