Schultz Electronics manufactures two large-screen television models: the Royale

Question

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 in 2017 was as follows.
Traditional Costing Royale Majestic Direct materials $ 700 $420 Direct labor ($20 per hour) 120 100 Manufacturing overhead ($38 per DLH) 228 190 Total per unit cost $1,048 $710
      In 2017, Schultz manufactured 25,000 units of the Royale and 10,000 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 total 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, 2017.
Activities Cost Drivers Estimated
Overhead Expected
Use of
Cost Drivers Activity-
Based
Overhead
Rate Purchasing Number of orders $1,200,000 40,000 $30/order Machine setups Number of setups 900,000 18,000 $50/setup Machining Machine hours 4,800,000 120,000 $40/hour Quality control Number of inspections 700,000 28,000 $25/inspection
The cost drivers used for each product were:
Cost Drivers 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

Explanation / Answer

ROYALE MAJESTIC Activity Activity rate Activity OH cost Activity OH cost Incurred Incurred Purchasing 30 17000 510000 23000 690000 Machine Setups 50 5000 250000 13000 650000 machining 40 75000 3000000 45000 1800000 Quality Control 25 11000 275000 17000 425000 Total Overheads 4,035,000 3565000 Divide: Number of Units 25000 10000 OH cost per units 161.4 356.5 Unit cost per unit and Gross profit per unit Royale Majestic Direct material 700 420 Direct labour 120 100 Manufacturing cost per unit 161.4 356.5 Total Cost per unit 981.4 876.5 Selling price per unit 1600 1300 Gross Margin per unit 618.6 423.5

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