P4-2A Schultz Electronics manufactures two large-screen television models: the Royale which sells for$1,600 and a new model, the Majestic, which sells for$1,300 The production cost computed per unit under traditional costing for each model is 2014 was as follows.

Traditional Costing

Royale

Majestic

Direct materials

$700

$420

Direct labor ($20 per hour)

120

100

Mfg overhead ($38 per DLH)

228

190

Total per unit cost

$1,048

$710

In 2014, Schultz manufactured25,000 units of the Royale and10,000 units of the Majestic. The overhead rate of $38 per direct labor hour was determined by dividing total expected manufacturing overhead of $7,600,000 by the direct labor hours 200,000 for the two models

Under traditional costing, the gross profit on the models was: Royale $552 or ($1,600 – $1,048) and Majestic $590 or ($1,300 – $710)  Because of this difference, management is considering phasing out the Royale model and increasing the production of the Majestic model.

Before finalizing its decision, management asks Schultz’s controller to prepare an analysis using activity-based costing (ABC). The controller accumulates the following information about overhead for the year ended December 31, 2014.

Activity

Cost Driver

EstimatedOverhead

ExpectedUse ofCostDrivers

Activity-BasedOverheadRate

 

Purchasing

Number of orders

$1,200,000

40,000

$30

per order

Machine setups

Number of setups

900,000

18,000

50

per setup

Machining

Machine hours

4,800,000

120,000

40

per hour

Quality control

Number of inspections

700,000

28,000

25

per inspection

The cost drivers used for each product were:

Cost Driver

Royale

Majestic

Total

Purchase orders

17,000

23,000

40,000

Machine setups

5,000

13,000

18,000

Machine hours

75,000

45,000

120,000

Inspections

11,000

17,000

28,000

Instructions

a. Assign the total 2014 manufacturing overhead costs to the two products using activity-based costing (ABC).

b What was the cost per unit and gross profit of each model using ABC costing?

c Are management’s future plans for the two models sound? Enter your answer in the block below.

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