Question 1

1. Total costs= indirect costs+direct costs= 4125000+2850000+3404000=10379000

Indirect cost / direct labor cost proportion:

= 3404000/ 2850000
= 1.194
For product Slim, Direct labor costs are 10*15000=150000. The indirect cost
allocation for Slim is therefore 1.194 of this: 150000*1.194=179100.
For product Laptop, Direct labor costs are 30*30000=900000. The indirect cost
allocation for Laptop is therefore 1.194 of this: 900000*1.194=1074600.
For product desktop, Direct labor costs are 20*90000=1800000. The indirect cost
allocation for desktop is therefore 1.194*1800000=2149200.

Unit cost for slim: 179100+375000=554100, 554100/15000=36.94

Unit cost for laptop: 1074600+2100000=3174600. 3174600/30000=105.82
Unit cost for desktop: 2149200+4500000=6649200. 6649200/90000=73.88

2. Total costs=10379000

For slim: set up costs: (83000/65)*50=63846

Machines costs: (1075000/15.5)*7.5=520161
Receiving costs: (890000/820)*700=759756
Packing costs: (615000/75)*50=410000
Engineering costs: (741000/130)*60=342000

Total indirect costs=2095763

For laptop: set up costs: (83000/65)*10=12769

Machines costs: (1075000/15.5)*3=208064
Receiving costs: (890000/820)*70=75976
Packing costs: (615000/75)*7=57400
Engineering costs: (741000/130)*25=142500

Total indirect costs=496709

For desktop: set up costs: (83000/65)*5=6384

Machines costs: (1075000/15.5)*5=346774
Receiving costs: (890000/820)*50=54268
Packing costs: (615000/75)*18=147600
Engineering costs: (741000/130)*45=256500

Total indirect costs=811526

unit cost for slim= (2095763+375000)/15000=164.72
unit cost for laptop= (496709+2100000)/30000=86.56
unit cost for desktop: (811526+4500000)/90000=59.02

3.

Slim Laptop Desktop

Unit cost for 36.94 105.82 73.88
traditional way
Unit cost for activity 164.72 86.56 59.02
based costing

Product slim has more unit costs based on activity costing, and it has the least selling
amounts, which resulting the least margins.

4. ABC recognizes that individual overhead components can be distributed

differently for different products. One product may consume relatively more
maintenance resources, for instance, while another product may consume
relatively less maintenance resources but relatively more machine set up
resources.

Traditional cost accounting typically puts overhead components into fewer

categories, or even a single category, and uses a single allocation rate for all
products.

set up costs are recovered by the number of production runs

machines costs are recovered by the machine hours
receiving costs are recovered by the number of receipts
packing costs are recovered by the number of deliveries
engineering costs are recovered by the number of production orders

Question 2

a. A 25% decrease in inventory will result to a 25% decrease in total assets. And
profits remain the same. Then ROI will be : 1/(1-0.4*0.36*0.25)=1.0373
So the ROI will increase by 3.73%

b. So a 10% increase in ROI means the new ROI will be 1.1, given the old one is 1.

1/(1-0.4*0.36*d)=1.1
d=0.631

so the inventory needs to be decreased by 63.1%.

c. So a 25% increase in ROI means the new ROI will be 1.25, given the old one is
1.

1/(1-0.4*0.36*d)=1.25
d=1.389
so the inventory needs to be decreased by 138.9%.