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 |
Estimated
Overhead |
Expected
Use of
Cost
Drivers |
Activity-
Based
Overhead
Rate |
|
| 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.