Reference no: EM132657537

TikTok Electronics manufactures an aluminium fibre tripod model "TRI-X" which sells for $1,600. The production cost computed per unit under traditional costing for each model in 2019 was as follows:

Traditional Costing TRIX

Direct Materials $700
Direct Labour ($20/hour) $120
Manufacturing overhead ($38 per DLH) $228
Total per unit cost $1, 048

In 2019, TikTok Electronics manufactured 26,000 units of TRI-X. Under traditional costing, the gross profit on TRI-X was $552 ($1,600-$1,048). Management is considering phasing out TRIX as it has continuously failed to reach the gross profit target of $600. Before finalizing its decision, management asks TikTok Electronics management accountant to prepare an analysis using activity-based costing (ABC). The management accountant accumulates the following information about overhead for the year ended December 31, 2019.

Activity Cost Pools                  Cost Drivers            Estimated Overhead             Expected Use of Cost Drivers

Purchasing                    Number of orders              $1,200,000                             40,000
Machine  setups                Number of setups            900,000                                 18,000
Machining                          Machine hours           4,800,000                             120,000
Quality Control              Number of inspections         700,000                              28,000

The cost drivers used:
Cost Drivers TRI-X Product

Purchase orders 17,000
Machine setups 5,000
Machine hours 75,000
Inspections 11,000

Required:

Question 1. Calculate the activity rates for each of the overhead items using the four cost drivers.

Question 2. Using the rates in (1) determine the unit cost for TRI-X.

Question 3. Calculate the gross profit of each model of TRI-X based on ABC costings and recommend whether or not TRI-X should be discontinued.