Reference no: EM132463248
Jacobson Electronics manufactures two HD television models: the Royale, which sells for $1,400, and a new model, the Majestic, which sells for $1,100. The production costs calculated per unit under traditional costing for each model in 2020 were as follows:
|
Traditional Costing
|
Royals
|
Majestic
|
|
Direct materials
|
$600
|
$320
|
|
Direct labour ($20 per hour)
|
100
|
80
|
|
Manufacturing overhead ($35 per direct labour hour)
|
175
|
140
|
|
Total per unit cost
|
$875
|
$540
|
Question point 1: In 2020, Jacobson manufactured 20,000 units of the Royale and 10,000 units of the Majestic. The overhead rate of $35 per direct labour hour was determined by dividing total estimated manufacturing overhead of $4.9 million by the total direct labour hours (140,000) for the two models.
Question point 1: Under traditional costing, the gross profit on the models was $525 for the Royale or ($1,400 - $875), and $560 for the Majestic or ($1,100 - $540). 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 Jacobson'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, 2020:
|
Activity Cost Pools
|
Cost Drivers
|
Estimated
Overhead
|
Estimated Use
of Cost Drivers
|
Activity-Based
Overhead Rate
|
|
Purchasing
|
Number of orders
|
$750,000
|
25,000
|
$30 per order
|
|
Machine set-ups
|
Number of set-ups
|
600,000
|
20,000
|
30 per set-up
|
|
Machining
|
Machine hours
|
3,100,000
|
100,000
|
31 per hour
|
|
Quality control
|
Number of inspections
|
450,000
|
5,000
|
90 per inspection
|