Problem 21-7A Problem 21-7A Schultz Electronics manufactures two large-screen te

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Problem 21-7A

Problem 21-7A

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 2017 was as follows.
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 2017, 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, 2017.
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

Explanation / Answer

A Assign the total 2017 manufacturing overhead costs to the two products using activity based costing (ABC) and determine the overhead cost per unit. ROYAL MAJESTIC Overhead Rate Rate Driver Assigned Cost Assigned Driver Assigned Cost Assigned Purchasing $30/order                 17,000                      510,000                 23,000                         690,000 Machine setups $50/setup                  5,000                      250,000                 13,000                         650,000 Machining $40/hour                 75,000                  3,000,000                 45,000                     1,800,000 Quality control $25/inspection                 11,000                      275,000                 17,000                         425,000 Total assigned costs                  4,035,000                     3,565,000 Totalunits produced 25000 10000 Cost per unit 161.40 356.50 B the cost per unit and gross profit of each model using ABC? Royale Majestic Direct Material $                  700.00 $                    420.00 Direct Labour $                  120.00 $                    100.00 Overhead $                  161.40 $                    356.50 Total Unit Cost $                  981.40 $                    876.50 Revenue $              1,600.00 $                1,300.00 Less: Expense $                  981.40 $                    876.50 Profit $                  618.60 $                    423.50

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