A data switch company specialises in the production of switches that can be used to link several personal computers to a shared printer. The company manufactures a low-cost manually operated data switch and a more expensive automatic data switch. Both types of switches are packed in multiples of five before they are despatched to retail outlets. An analysis of the company's production reveals the following:
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Manual data switch
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Automatic data switch
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Production volume
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1500
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500
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Direct Material's cost
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£20/unit
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£30/unit
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Activity based production analysis:
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Set-up cost
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1@£15,000
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1@15,000
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Manufacturing costs
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500@£4/unit
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500@£10/unit
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Assembly cost
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500@£2/unit
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500@£4/unit
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Packaging
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300@£10/unit
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100@£10/unit
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Despatch/delivery
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300@£20/unit
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100@£20/unit
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1 Determine the cost of each product using activity based costing?
2 Discuss the suitability of this type of costing for the engineering business of this company and the company you established in Task 1.
3 Measure the impact on the business performance of changing all the company products from Manual to Automatic data switch and producing the whole production volume (2000 units). Discuss the advantages and disadvantages of such activity on the performance of the whole business.