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Air Purifiers in Singapore | Haze Busters

Haze Busters is a manufacturer of air purifiers systems in Singapore. It produces two types of air purifiers. The basic model is meant for home use whereas the enhanced model is meant for commercial use.

At present its overhead costing system allocates indirect cost to products using machine hours as an allocation base. However, the Chief Accountant of the company has decided to introduce an Activity Based Costing system in a bid to improve overhead allocation to the products.

The direct cost incurred for the units produced last year was as follows:

 Basic Enhanced \$ \$ Units 10,000 3,000 Direct Material 1,000,000 600,000 Direct Labour 400,000 135,000

The Basic unit was priced at \$564 and the Enhanced at \$980 per unit. The company’s sales policy require that each product achieve a minimum profit margin of 35%.

The following data have been collected for all indirect cost:

 Activity Annual cost \$ Quality Inspection 800,000 Set-up Cost 650,000 Container Shipping 300,000 Stores Handling cost 50,000 Factory Overheads 1,500,000 Total 3,300,000

The following data has also been collected by the research team involved in implementation of the ABC system.

 Total Basic Enhanced Number of inspections 10,000 2,000 8,000 Number of set-ups 500 100 400 Number of Handling Hours (Stores) 32,000

Each 40 foot container used can load 200 basic units or 150 enhanced units.

Each Basic unit requires 2 handling hours in the Stores. Basic requires 2 machine hours to produce whereas the Enhanced requires 3 machine hours to produce.

Required:

a)    Compute the gross profit per unit for both products using the single indirect cost pool method. (5 Marks)

b)    Prepare a schedule calculating the unit cost and gross profit per unit of both products using an activity based costing approach. (10 Marks)

c)    Based on the ABC results, what course of action should the management of Haze Busters Ltd take? (5 marks)

d)    Based on the results in a) and b) and the information given, would you recommend that the company introduce the ABC system. Provide the reasons for the recommendation. (5 marks)

Answers to part a) and b) should be rounded to the nearest dollar.