Luzent Company produces two types of entry doors: Deluxe and Standard. The assignment basis for support costs has been direct labor Dirhams. For 2018, Luzent compiled the following data for the two products: Deluxe Standard Sales units 50,000 400,000 Sales price per unit Dh650.00 Dh475.00 Prime costs per unit Dh180.00 Dh130.00 Direct materials cost per unit Dh95.00 Dh75.00 Direct labor costs per unit Dh75.00 Dh55.00 Manufacturing support costs per unit Dh 80.00 Dh120.00 Last year, Luzent Manufacturing purchased an expensive robotics system to allow for more decorative door products in the deluxe product line. The CFO suggested that an ABC analysis could be valuable to help evaluate a product mix and promotion strategy for the next sales campaign. She obtained the following ABC information for 2018: Activity Cost Driver Cost Total Deluxe Standard Setups of setups Dh 500,000 500 400 100 Machine-related of machine hours Dh44,000,000 600,000 300,000 300,000 Packing of shipments Dh 5,000,000 250,000 50,000 200,000 Required: a. Using the current system, what is the estimated 1. total cost of manufacturing one unit for each type of door? 2. profit per unit for each type of door? b. Using the current system, estimated manufacturing overhead costs per unit are less for the deluxe door (Dh80 per unit) than the standard door (Dh120 per unit). What is a likely explanation for this? c. “ABC systems may result in misallocation of indirect costs.” Do you agree? Give reasons for your answer. d. What considerations need to be examined when determining a sales mix strategy? e. While implementing an ABC system for the first time, achieving a significant change overnight is difficult and this may de motivate employees. How can managers overcome this problem?
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