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P4-2A Schultz Electronics

Price: $2.50

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 2014 was as

  Royale Majestic
Direct materials  700  420
Direct labor ($20 per hour)  120  100
Manufacturing overhead ($38 per DLH)  228  190
   1,048  710

In 2014, 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, 2014.

Activity Cost Driver Total Cost Cost Driver Volume Overhead Rate
Purchase orders  Number of orders   1,200,000  40,000  30
Machine setups  Number of setups   900,000  18,000  50
Machining  Machine hours   4,800,000  120,000  40
Quality control  Number of inspections   700,000  28,000  25
The cost drivers used for each product were:

Cost Driver Royale Total
Purchase orders  17,000 40,000
Machine setups  5,000 18,000
Machine hours  75,000 120,000
Inspections  11,000 28,000

(a) Assign the total 2014 manufacturing overhead costs to the two products using activity based
costing (ABC) and determine the overhead cost per unit.
(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? Explain

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