Traditional Costing Royale Majestic

P4-2A 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 is 2014 was as follows.
Traditional Costing Royale Majestic
Direct materials $700 $420
Direct labor ($20 per hour) 120 100
Mfg overhead ($38 per DLH) 228 190
Total per unit cost $1,048 $710

In 2014, Schultz manufactured25,000 units of the Royale and10,000 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 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 Estimated

Overhead Expected

Use of

Cost

Drivers Activity-

Based

Overhead

Rate
Purchasing Number of orders $1,200,000 40,000 $30 per order
Machine setups Number of setups 900,000 18,000 50 per setup
Machining Machine hours 4,800,000 120,000 40 per hour
Quality control Number of inspections 700,000 28,000 25 per inspection

The cost drivers used for each product were:
Cost Driver 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

Instructions
a. Assign the total 2014 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? Enter your answer in the block below.