Based on the following income statement for the year ended November 30, 2017, senior management at Bamber have decided to concentrate Provencer's marketing resources on the Maximum model and to begin to phase out the Mammoth model because Maximum generates a much bigger operating income per unit. Provencer Electronics Income Statement for the Fiscal Year Ended November 30, 2017 Activity Center (Cost-Allocation Base) Total Activity Costs Soldering (number of solder points) Shipments (number of shipments) $ Units of the Cost-Allocation Base Mammoth Maximum Total 1,065,000 1,195,000 225,000 1,420,000 1,261,000 15,800 10,200 26,000 Mammoth Maximum Total Revenues $ 23,136,000 $ 7,764,000 $ 15,045,600 5,279,400 30,900,000 20,325,000 Cost of goods sold Gross margin 8,090,400 2,484,600 10,575,000 Quality control (number of inspections) Purchase orders (number of orders) 1,141,000 56,800 13,200 70,000 1,170,000 85,100 109,900 195,000 5,784,000 1,552,800 7,336,800 Selling and administrative expense * 2,306,400 $ 931,800 $ 3,238,200 Operating income Units produced and sold 24,000 6,000 Machine power (machine-hours) Machine setups (number of setups) 57,000 173,400 16,600 190,000 1,246,000 16,300 18,700 35,000 Operating income per unit sold $ 96.10 $ 155.30 5,940,000 Details for cost of goods sold for Mammoth and Maximum are as follows: Total manufacturing overhead Mammoth Maximum Total Per Unit Total Per Unit Direct materials * 5,498,400 $ 229.10 $ 3,855,000 $ 642.50 Direct manufacturing labor 504,000 21.00 294,000 49.00 3,763,200 Machine costs (b) 156.80 470,400 Total direct costs Manufacturing overhead costs $ 9,765,600 $ 5,280,000 15,045,600 $ 406.90 $ 4,619,400 $ 220.00 660,000 110.00 5,279,400 $ 879.90 Total cost of goods sold (a) Mammoth requires 1.5 hours per unit and Maximum requires 3.5 hours per unit. The direct manufacturing labor cost is $14.00 per hour (b) Machine costs include lease costs of the machine, repairs, and maintenance. Mammoth requires 8 machine-hours per unit and Maximum requires 4 machine-hours per unit. The machine-hour rate is $19.60 per hour. (c) Manufacturing overhead costs are allocated to products based on machine-hours at the rate of $27.50 per hour. Campbell does not like what he sees. "If you show headquarters this analysis, they are going to ask us to phase out the Maximum line, which we have just introduced. This whole costing stuff has been a major problem for us. First Mammoth was not profitable and now Maximum. "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." Johnson knows that his numbers are fairly accurate. As a quick check, he calculates the profitability of Maximum and Mammoth using more and different allocation bases. The set of activities and activity rates he had used results in numbers that closely approximate those based on more detailed analyses. He is confident that headquarters, knowing that Maximum was introduced only recently, will not ask Provencer to phase it out. He is also aware that a sizable portion of Campbell's bonus is based on division revenues. Phasing out either product would adversely affect his bonus. Still, he feels some pressure from Campbell to do something 1. Using activity-based costing, calculate the gross margin per unit of the Maximum and Mammoth models. 2. Explain briefly why these numbers differ from the gross margin per unit of the Maximum and Mammoth models calculated using Provencer's existing simple costing system. 3. Comment on Campbell's concerns about the accuracy and limitations of ABC. 4. How might Provencer find the ABC information helpful in managing its business? 5. What should Steven Johnson do in response to Campbell's comments? Provencer Electronics, a division of Bamber Corporation, manufactures two large-screen television models: the Mammoth, which has been produced since 2013 and sells for $964, and the Maximum, a newer model introduced in early 2015 that sells for $1,294. (Click the icon to view additional information.) Provencer's controller, Steven Johnson, is advocating the use of activity-based costing and activity-based management and has gathered information about the company's manufacturing overhead costs for the year ended November 30, 2017. After completing his analysis, Johnson shows the results to Charlie Campbell, the Provencer division president. (Click the icon to view the ABC data.) (Click the icon to view Campbell's response.) Read the requirements.