absorption cost

 

A computer manufacturer produces three types of devices:mobile phones, tablets, and computers. For the production of these three devices you have the following information:

 

Phone

Tablet

Computer

Material cost per unit

£90

£140

£315

Direct labor hours per unit

2

2.5

4

Budgeted units

1,500,000

900,000

1,200,000

 

     

Labor cost per hour

£8

Overhead costs per annum

Utilities

£20,000,000

Rent

£15,000,000

Audit and legal

£5,000,000

Administrative staff

£40,000,000

Total

£80,000,000

ABC analysis suggested that overhead costs are distributed to the three products according to the table below:

Overheads

Phone

Tablet

Computer

Utilities

 £8,000,000

 £5,000,000

 £7,000,000

Rent

 £8,250,000

 £2,250,000

 £4,500,000

Audit and legal

 £2,900,000

 £1,250,000

 £850,000

Administrative staff

 £23,200,000

 £6,000,000

 £10,800,000

For each of the three products, the company aims at a different percentage for profit. Under the full absorption costing method and the targeted profit percentage, the prices of the three products should be:

 

Phone

Tablet

Computer

Full costing price

£170.69

£233.87

£435.67

  1. Calculate the aimed profit percentages for the three products and under the full absorption costing method, with overhead costs absorbed on the basis of direct labour hours.
  2. Use the profit percentages that you derived in (1) and calculate the prices of the three products under the ABC system.
  3. Recommend a cost system and include any changes that you would suggest to the pricing strategy of the computer company (target length 300 words).