XYZ Engg. Ltd. manufactures two types of specialized components Alpha and Beta. Following data pertains to their operations for the month of October…

(i) Cost Driver Rates for Each Overhead Activity: Activity Overhead Cost (A) Cost Driver Level (B) Cost Driver Rate (in ₹) (A)/(B) Material Handling 60,000 30 + 20 = 50 1,200 per purchase order Production Set-up 1,44,000 80 + 100 = 180 800 per machine setup (ii) Allocation of Overheads Using ABC: Component Material Handling (in ₹) (A) Production Setup (in ₹) (B) Total Overhead Cost (in ₹) (A) + (B) Alpha 30 x 1,200 = 36,000 80 x 800 = 64,000 1,00,000 Beta 20 x 1,200 = 24,000 100 x 800 = 80,000 1,04,000 Computation of Total Cost and Cost per Unit using ABC: Component Direct Material Cost (₹) Direct Labour Cost (₹) Total Overhead Cost (₹) Total Cost (₹) Cost per Unit (₹) Alpha 8,000 × 25 = 2,00,000 8,000 × 18 = 1,44,000 1,00,000 4,44,000 4,44,000/8,000 = 55.50 Beta 12,000 × 15 = 1,80,000 12,000 × 12 = 1,44,000 1,04,000 4,28,000 4,28,000/12,000 = 35.67 (iii) Outsourcing Analysis for Production Setup (Alpha): Current production setup cost for Alpha = 64,000 New Outsourcing Cost = 600 × 80 setups = 48,000 Cost Savings = 64,000 -48,000 = 16,000 or (₹ 800 - 600) x 80 setups Outsourcing the Production Setup for Alpha would be financially advantageous for the company as it reduces costs by - 16,000.