to products P4-2A Schultz Electronics manufactures two ultra high-definition tel

Question

to products P4-2A Schultz Electronics manufactures two ultra high-definition television models: the Royale d evaluate 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 Direct labor ($20 per hour) Manufacturing overhead ($38 per DLH) Total per unit cost $ 700 120 228 $1,048 $420 100 190 $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 man- ufacturing 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 ($1,600- $1,048) and Majestic $590 ($1,300 - $710). Because of this difference, management is con- sidering 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. Activity- ased Overhead Rate $30/order $50/setup $40/hour $25/inspection Expected Use of Activity Estimated Overhead Cost Drivers Cost Pools Purchasing Machine setups Machining Quality control Cost Drivers Number of orders Number of setups Machine hours Number of inspections 40,000 18,000 120,000 28,000 $1,200,000 40.000 900,000 4,800,000 700,000

Explanation / Answer

Answer a. Assigning Overhead Cost to Product Model Using ABC Method Activity Based Overhead Rate Royale Majestic Cost Driver Incurred OH Allocated Cost Driver Incurred OH Allocated Purchasing                    30.00 per order               17,000 order                 510,000             23,000 order              690,000 Machine Setups                    50.00 per setup                 5,000 setup                 250,000             13,000 setup              650,000 Machining                    40.00 per hour               75,000 hour             3,000,000             45,000 hour          1,800,000 Quality Control                    25.00 per inspection               11,000 inspection                 275,000             17,000 inspection              425,000 Total Overhead Cost             4,035,000          3,565,000 No. of Units Produced                   25,000                10,000 Overhead Cost per Unit                   161.40                356.50 Answer b. Cost per Unit Royale Majestic Direct Material                  700.00                     420.00 Direct Labor                  120.00                     100.00 Overhead                  161.40                     356.50 Total Cost per Unit                  981.40                     876.50 Royale Majestic SP per Unit              1,600.00                 1,300.00 Cost per Unit                  981.40                     876.50 Gross Profit per Unit                  618.60                     423.50 Answer c. As per ABC Costing, the actual cost per unit of Royale Model are less than the cost as per traditional costing. This means more gross margin as anticipated. So, the company should increase the production and sales of Royale Model to increase the profit, rather than Majestic Model

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