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Schultz Electronics manufactures two large-screen television models
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.
