The Gadget Co produces three products, A, B and C, all made from the same material. Until now, it has used traditional absorption costing to allocate overheads to its products. The company is now considering an activity based costing system in the hope that it will improve profitability. Information for the three products for the last year is as follows: A B CProduction and sales volumes (units)15,000 12,000 18,000Selling price per unit $7.50 $12 $13Raw material usage (kg) per unit 2 34Direct labour hours per unit 0·10·15 0·2Machine hours per unit 0·5 0·7 0·9Number of production runs per annum 16 12 8Number of purchase orders per annum 24 28 42Number of deliveries to retailers per annum 48 30 62The price for raw materials remained constant throughout the year at $1·20 per kg. Similarly, the direct labour cost for the whole workforce was $14·80 per hour. The annual overhead costs were as follows:$Machine set up costs 26,550Machine running costs 66,400Procurement costs 48,000Delivery costs54,320Required:
(c) Using your calculation from (a) and (b) above, explain how activity based costing may help The Gadget Co improve the profitability of each product. (6 marks)
