Applewood Electronics, a division of Elgin Corporation, manufactures two large-screen television models: the Monarch, which has been produced since 2008 and sells for $1,700, and the Regal, a new model introduced in early 2008, which sells for $2,200. Based on the following income statement for the year ended November 30, 2012, senior management at Elgin have decided to concentrate Applewood's marketing resources on the Regal model and begin to phase out the Monarch model.

Unit costs for the Monarch and Regal are as follows:

Applewood's controller, Susan Benzo, is advocating the use of activity-based costing (ABC) and activity-based management (ABM), and has gathered the following information about the company's manufacturing overhead costs for the year ended November 30, 2012.

After completing her analysis, Benzo showed the results to Filipe Figueira, the Applewood Division President. Figueira did not like what he saw. "If you show headquarters this analysis, they are going to ask us to phase out the Regal line, which we have just intro duced. This whole costing thing has been a major problem for us. First Monarch was not profitable and now Regal.
"Looking at the ABC analysis, I see two problems. We do many more activities than the ones you have listed. If you had included all activities, maybe your conclusions would have been different. Second, you used number of setups and number of inspections as allocation bases. The numbers would have been different had you usedsetup hours and inspection hours instead. I know that measurement problems precluded you from using these other cost allocation bases, but at least 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." Benzo knew her numbers were fairly accurate. On a limited sample, she had calculated the profitability of Regal and Monarch using different allocation bases. The set of activities and activity rates she had chosen resulted in numbers that approximated closely those based on more detailed analyses. She was confident that headquarters, knowing that Regal was introduced only recently, would not ask Applewood to phase it out. She was also aware that a sizable portion of Figueira's bonus was based on division sales. Phasing out either product would adversely affect the bonus. Still, she felt some pressure from Figueira to do something.
REQUIRED
1. Using activity-based costing (ABC), 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 costing system.
3. Comment on Figueira'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?

Transcribed Image Text:

Applewood Electronics Income Statement For the Year Ended November 30, 2012 Monarch Regal Total Sales Cost of goods sold Gross mar Selling and administrative expense Operating income Units sold Operating income per unit sold S30,600,000 19,890,000 10,710,000 8,032,500 S 2,677,500 18,000 S148.75 $4,400,000 3,080,000 1,320,000 925,000 S 395,000 $35,000,000 22,970,000 12,030,000 8,957,500 $3,072,500 gin 2,000 S 197.50 Monarch Regal Direct materials Direct labour S 540.00 $1,089.00 Monarch (2.5 hours × $18 per hr) Regal (7.0 hours × $18 per hr) 45.00 126.00 Machine costs Monarch (8 hours X $25 per hr) Regal (5 hours × $25 per hr) 200.00 Other manufacturing overhead* Total 320.00 $1,105.00 125.00 200.00 S1,540.00 Units of Cost Driver Activity Centre Total Activity Costs S1,872,400 1,480,000 1,749,600 582,400 MonarchRegal Soldering (number of solder points) Shipments (number of shipments) Quality control (number of inspections) Purchase orders (number of POs) Machine power (machine hours) Machine setups (number of setups) Total manufacturing overhead 1,296,000 214,000 500 18,000 4,160 10,000 100 1,500 54,000 16,640 144,000 360 61,600 414,000 S6,160,000