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 2020 was as follows.

Assign overhead to products using ABC and evaluate decision.

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 2020, 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, 2020.

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

Instructions Please use an Excel spreadsheet for your answers, clearly marking the answers to each requirement (a) – (c)

a. Assign the total 2020 manufacturing overhead costs to the two products using activity-based costing (ABC) and determine the overhead cost per unit.

b. What was the cost per unit and gross profit of each model using ABC?

c. Are management’s future plans for the two models sound? Explain.

Answer 1