ABC, implementation, ethics. (CMA, adapted) Applewood Electronics, a division of Elgin Corporation, manufactures two large-screen television models: the Monarch, which has been produced since 2004 and sells $900, and the Regal, a newer model introduced in early 2007 that sells for $1,140. Based on the following come statement for the year ended November 30, 2008, senior management at Elgin have decided to concentrate Applewood’s marketing resources on the Regal model and to begin to phase out the Monarch model.

Applewood Electronics Income Statement for the Fiscal Year Ended November 30, 2008

Unit costs for Monarch and Regal are as follows:

Machine costs include lease costs of the machine, repairs, and maintenance.

Manufacturing overhead was allocated to products based on machine-hours at the rate of $25 per hone.

Applewood’s controller, Susan Benzo, is advocating the use of activity-based costing and activity-based management and has gathered the following information about the company’s manufacturing overhead costs for the year ended November 30, 2008.

After completing her analysis, Benzo shows the results to Fred Duval, the Applewood division president. Duval does netlike what he sees. “If you show headquarters this analysis, they are going to ask us to phase out the Regal line, which we have just introduced. This whole costing stuff has been a major problem for us. First Monarch was not profitable and now Regal.”

“Looking at the ABC analysis, I see two problems. First, we do many more activities than the ones you have listed. If you had included all activities, maybe your conclusions would be different. Second, you used number of setups and number of inspections as allocation bases. The numbers would be different had you used setup-hours and inspection-hours instead. I know that measurement problems precluded you from using these other cost-allocation bases, but I believe you ought to make some adjustments to our current numbers to compensate for these issues. I know you can do better. We can’t afford to phase out either product”

Bonzo knows that her numbers are fairly accurate. As a quick check, she calculates the profitability of Regal and Monarch using more and different allocation bases. The set of activities and activity rates she had used resulted in numbers that closely approximate those based on more detailed analyses. She is confident that headquarters, knowing that Regal was introduced only recently, will not ask Applewood to phase it out. She is also aware that a sizable portion of Duval’s bonus is based on division revenues. Phasing out either product would adversely affect his bonus. Still, she feels some pressure from Duval to do something.

1. Using activity-based costing, calculate the profitability of the Regal and Monarch models.

2. Explain briefly why these numbers differ from the profitability of the Regal and Monarch models calculated using Applewood’s existing simple costing system.

3. Comment on Duval’s concerns about the accuracy and limitations of ABC.

4. How might Applewood find the ABC information helpful in managing its business?

5. What should Susan Benzo do in response to Duval’s comments?

Transcribed Image Text:

Monarch Regal Total Revenues Cost of goods sold Gross margin Selling and administrative expense Operating income Units produced and sold Net income per unit sold $24,360,000 15,732,000 8,628,000 $19,800,000 $4,560,000 3,192,000 12,540,000 $ 390,000 4,000 $ 1,430,000 22,000 $ 1,820,000 $65.00 $97.50