Schultz Electronics manufactures two large-screen television models: the Royale which sells for

P4-2A 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

1. 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.

 

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