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Darby Electronics manufactures two large-screen television models: the Royale

Price: $2.50


*P21-7A Darby Electronics manufactures two large-screen television models: the Royale
which sells for $1,500, and a new model, the Majestic, which sells for $1,200.The production cost
per unit for each model in 2010 was as follows.


  Royale Majestic
Direct materials  700  420
Direct labor ($20 per hour)  100  80
Manufacturing overhead ($40 per DLH)  200  160
   1,000  660

In 2010, Darby manufactured 30,000 units of the Royale and 10,000 units of the Majestic. The
overhead rate of $40 per direct labor hour was determined by dividing total expected manufacturing
overhead of $7,600,000 by the total direct labor hours (190,000) for the two models.
The gross profit on the model was: Royale $500 ($1,500 - $1,000) and Majestic $540
($1,200 - $660). 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 the controller, Marie Stumfall, to prepare an
analysis using activity-based costing. Marie accumulates the following information about overhead
for the year ended December 31, 2010.

Activity Cost Driver Total Cost Cost Driver Volume Overhead Rate
Purchase orders  Number of orders   1,200,000  30,000  40
Machine setups  Number of setups   900,000  15,000  60
Machining  Machine hours   4,800,000  160,000  30
Quality control  Number of inspections   700,000  35,000  20

The cost driver volume for each product was:


Cost Driver Royale Total
Purchase orders  16,000 30,000
Machine setups  5,000 15,000
Machine hours  100,000 160,000
Inspections  10,000 35,000

The cost driver volume for each product was:

Instructions
(a) Assign the total 2010 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?

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