Question

Schultz Electronics manufactures two ultra high-definition television models: the Royale which sells for $1,480, and a new model, the Majestic, which sells for $1,270. The production cost computed per unit under traditional costing for each model in 2020 was as follows. Traditional Costing Direct materials Direct labor ($20 per hour) Manufacturing overhead ($42 per DLH) Total per unit cost Royale $630 120 252 $1,002 Majestic $410 100 210 $720 In 2020, Schultz manufactured 25,000 units of the Royale and 10,000 units of the Majestic. The overhead rate of $42 per direct labor hour was determined by dividing total estimated manufacturing overhead of $8,354,000 by the total direct labor hours (200,000) for the two models. Under traditional costing, the gross profit on the models was Royale $478 ($1,480 - $1,002) and Majestic $550 ($1,270 - $720). 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. Activity-Based Overhead Rate Activity Cost Pools Purchasing Machine setups Machining Quality control Cost Drivers Number of orders Number of setups Machine hours Number of inspections Estimated Overhead $1,400,800 932,800 5,240,400 780,000 Estimated Use of Cost Drivers 41,200 17,600 119,100 30,000 $34/order $53/setup $44/hour $26/inspection The cost drivers used for each product were: Cost Drivers Purchase orders Machine setups Machine hours Inspections Royale 18,000 5,000 75,000 12,000 Majestic 23,200 12,600 44,100 18,000 Total 41,200 17,600 119,100 30,000

Answer 1

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Part 1
		Royale		Majestic
Activity	Activity Rate	Cost Drivers	Cost Assigned	Cost Drivers	Cost Assigned
Purchasing	$                      34	18,000	$             612,000	23,200	$             788,800
Machine setups	$                      53	5,000	$             265,000	12,600	$             667,800
Machine Hours	$                      44	75,000	$          3,300,000	44,100	$          1,940,400
Inspections	$                      26	12,000	$             312,000	18,000	$             468,000
Total Cost Assigned			$          4,489,000		$          3,865,000
No of units			25,000		10,000
Cost per unit			$                179.56		$                386.50
Part 2
		Royale	Majestic
Direct Material		$            630.00	$                410.00
Direct Labor		$            120.00	$                100.00
Overhead Cost		$            179.56	$                386.50
Total Cost per unit (ABC)		$            929.56	$                896.50
Part 3
		Royale	Majestic
Sale Price		$        1,480.00	$            1,270.00
Cost per unit		$          (929.56)	$             (896.50)
Gross Margin per unit		$            550.44	$                373.50