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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
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?