Problem 4-2A (Part Level Submission) Schultz Electronics manufactures two large-

Question

Problem 4-2A (Part Level Submission)

Schultz Electronics manufactures two large-screen television models: the Royale which sells for $1,546, and a new model, the Majestic, which sells for $1,315. The production cost computed per unit under traditional costing for each model in 2014 was as follows.

In 2014, 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 expected manufacturing overhead of $8,154,010 by the total direct labor hours (200,000) for the two models.

Under traditional costing, the gross profit on the models was Royale $540 or ($1,546 – $1,006), and Majestic $600 or ($1,315 – $715). 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.

The cost drivers used for each product were:

Assign the total 2014 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.)

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

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

Traditional Costing Royale Majestic Direct Materials $640 $410 Direct Labor ($20 per hour) 120 100 Manufacturing Overhead ($41 per DLH) 246 205 Total per unit cost $1006 $715

Explanation / Answer

Schultz Electronics Answer 1 = Calculation of overhead cost per unit using ABC Cost allocation using ABC Products ParticuLars Total Royale Majestic (i) Purchase activity cost Purchase orders required (a) 39870 16510 23360 no.of orders Activity-Based Overhead Rate (b) 35 35 35 in $ per order Cost of purchasing (a*b) 1395450 577850 817600 in $ (ii) Machine setup cost Machine setup required (a) 18250 5270 12980 no.of setups Activity-Based Overhead Rate (b) 53 53 53 in $ per setup Cost of machine setup (a*b) 967250 279310 687940 in $ (iii) Machining cost Machine hours required (a) 121390 75660 45730 no.of machine hours Activity-Based Overhead Rate (b) 41 41 41 in $ per hour Cost of machining (a*b) 4976990 3102060 1874930 in $ (iv) Quality Control cost Inspections required (a) 28080 11900 16180 no.of inspections Activity-Based Overhead Rate (b) 29 29 29 in $ per inspection Cost of Quality control (a*b) 814320 345100 469220 in $ Total Overhead cost (a) 8154010 4304320 3849690 in $ Total Units manufactured (b) 25000 10000 in no of units Overhead cost per unit (a / b)                  172.17              384.97 in $ per unit Answer 2 = Calculation of TOTAL cost per unit using ABC Products ParticuLars Royale Majestic Direct material per unit 640 410 Direct labour per unit 120 100 Overhead cost per unit 172.17 384.97 Total Cost per unit 932.17 894.97 Answer 3 = Calculation of Gross Profit using ABC Products ParticuLars Royale Majestic Sales price per unit 1546 1315 in $ Less Total cost per unit 932.7 894.97 in $ Gross profit per unit (a) 613.3 420.03 in $ Total units manufactured (b) 25000 10000 in no.of units Gross profit (a * b) 1,53,32,500.00 42,00,300.00 in $

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