18-2B: Kinnard Electronics manufactures two home theater systems: the Elite which sells for $1,400, and a new model, the Preferred, which sells for $1,100. The production cost computed per unit under traditional costing for each model in 2017 was as follows.

Traditional Costing	Elite	Prefered
Direct Materials	$600	$320
Direct Labor ($20 per hour)	100	80
Manufacturing Overhead ($35 per DHL)	175	140
Total Per Unit Cost	$875	$540

Under traditional costing, the gross profit on the models was Elite $525 ($1,400 $875), and Preferred $560 ($1,100 $540). Because of this difference, management is considering phasing out Elite and increasing production of Preferred. Before finalizing its decision, management asks Kinnards controller to prepare an analysis using activity-based costing (ABC). The controller accumulates the following information about overhead for the year ended December 31, 2017.In 2017, Kinnard manufactured 20,000 units of the Elite and 10,000 units of the Preferred. The overhead rate of $35 per direct labor hour was determined by dividing total expected manufacturing overhead of $4,900,000 by the total direct labor hours (140,000) for the two models.

Activity	Cost Driver	Estimated Overhead	Expected Use of Cost Drivers	Activity Based Overhead Rate
Purchasing	# of orders	$75000	25000	$31
Machine Setup	# of setups	580000	20000	29
Machineing	Machine Hours	3100000	100000	31
Quality Control	# of inspections	445000	5000	89

The cost drivers used for each product were:

Cost Driver	Elite	Preferred	Total
Number of Orders	11250	13750	$25000
Number of Setups	11000	9000	20000
Machine Hours	40000	60000	100000
Number of Inspections	2750	2250	5000

Instructions:

(a) Assign the total 2017 manufacturing overhead costs to the two products using activity-based costing (ABC) and determine the overhead cost per unit.

(b) What was the cost per unit and gross profit of each model using ABC costing?

(c) Are managements future plans for the two models sound? Explain.