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TikTok Electronics manufactures an aluminium fibre tripod model “TRI-X” which sells for $1,600. The production cost...

TikTok Electronics manufactures an aluminium fibre tripod model “TRI-X” which sells for $1,600. The production cost computed per unit under traditional costing for each model in 2019 was as follows:

Traditional Costing TRIX

Direct Materials $700

Direct Labour ($20/hour) $120

Manufacturing overhead ($38 per DLH) $228

Total per-unit cost $1, 048

In 2019, TikTok Electronics manufactured 26,000 units of TRI-X. Under traditional costing, the gross profit on TRI-X was $552 ($1,600-$1,048). Management is considering phasing out TRIX as it has continuously failed to reach the gross profit target of $600. Before finalizing its decision, management asks TikTok Electronics management accountant to prepare an analysis using activity-based costing (ABC). The management accountant accumulates the following information about overhead for the year ended December 31, 2019.

Activity Cost Pools Cost Drivers Estimated Overhead Expected Use of Cost Drivers

Purchasing Number of orders $1,200,000 40,000

Machine setups Number of setups 900,000 18,000

Machining Machine hours 4,800,000 120,000

Quality Control Number of inspections 700,000 28,000

The cost drivers used:

Cost Drivers TRI-X Product

Purchase orders 17,000

Machine setups 5,000

Machine hours 75,000

Inspections 11,000

Required:

1. Calculate the activity rates for each of the overhead items using the four cost drivers.

2. Using the rates in (1) determine the unit cost for TRI-X.

3. Calculate the gross profit of each model of TRI-X based on ABC costings and recommend whether or not TRI-X should be discontinued.

SHOW YOUR WORKING

Solutions

Expert Solution

1. Rate of Each Overhead Items

Overheah Cost Amount Basis No Of Activity Price per Activity
PUrchasing Cost 1200000 No of Purchases 40000 30
Machine Set-up Cost 900000 No of Set ups 18000 50
Machining Cost 4800000 No of Machine Hours 120000 40
Quaility Cost 700000 No of Inspections 28000 25
Total 145

2. Calculation of unit cost for Product

Particulars Amount
Direct Material (700*26000) 18200000
Direct labour (120*26000) 3120000
Purchasing Cost (30*17000) 510000
Machine Set Up (50*5000) 250000
Machining (40*75000) 3000000
Inspection Cost (25*11000) 275000
Total Cost of Production 25355000
Unit Produced 26000
Cost Per Unit 975.192

Notes: Overhead cost has been calculated on Actual basis considering the actual drivers used over estimated Overhead.

3. Calculation of Gross Profit

Particulars Amount
Selling Price Per unit 1600
Cost Per unit as per Table 2 above 975.192
Gross Profit per Unit 624.808
No Of units 26000
Total Gross Profit 16245008

Advise: Compan should not discontinue the product as the company is earning $624.808 per unit of product which is $24.808 higher then their desired Gross profit i.e. $600 Per unit.

ekkarill92 answered 1 year ago
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