Question

Schultz Electronics manufactures two ultra high-definition television models: the Royale which sells for $1,480, and a new model, the Majestic, which sells for $1,320. The production cost computed per unit under traditional costing for each model in 2020 was as follows.

Traditional Costing		Royale		Majestic
Direct materials		$620		$420
Direct labor ($20 per hour)		120		100
Manufacturing overhead ($41 per DLH)		246		205
Total per unit cost		$986		$725

In 2020, Schultz manufactured 25,000 units of the Royale and 10,000 units of the Majestic. The overhead rate of $41 per direct labor hour was determined by dividing total estimated manufacturing overhead of $8,202,400 by the total direct labor hours (200,000) for the two models.

Under traditional costing, the gross profit on the models was Royale $494 ($1,480 – $986) and Majestic $595 ($1,320 – $725). 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, 2020.

Activity Cost Pools		Cost Drivers		Estimated Overhead		Estimated Use of Cost Drivers		Activity-Based Overhead Rate
Purchasing		Number of orders		$1,228,800		38,400		$32/order
Machine setups		Number of setups		846,600		16,600		$51/setup
Machining		Machine hours		5,297,600		120,400		$44/hour
Quality control		Number of inspections		829,400		28,600		$29/inspection

The cost drivers used for each product were:

Cost Drivers		Royale		Majestic		Total
Purchase orders		16,000		22,400		38,400
Machine setups		4,000		12,600		16,600
Machine hours		75,000		45,400		120,400
Inspections		10,000		18,600		28,600

Assign the total 2020 manufacturing overhead costs to the two products using activity-based costing (ABC) and determine the overhead cost per unit. (Round cost per unit to 2 decimal places, e.g. 12.25.)

		Royale		Majestic
Total assigned costs		$		$
Cost per unit		$		$

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Calculate cost per unit of each model using ABC costing. (Round answers to 2 decimal places, e.g. 12.25.)

		Royale		Majestic
Cost per unit		$		$

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Calculate gross profit of each model using ABC costing. (Round answers to 2 decimal places, e.g. 12.25.)

		Royale		Majestic
Gross profit		$		$

Answer 1