Queensland Electronics Company manufactures two large-screen television models, the Novelle, which has been produced for 10 years and sells for $910, and the Zodiac, a new model introduced in early 20x3, which sells for $1,160. Based on the following income statement for 20x4, a decision has been made to concentrate Queensland’s marketing resources on the Zodiac model and to begin to phase out the Novelle model.

The standard unit costs for the Zodiac and Novelle models are as follows:

Queensland Electronics Company’s controller 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 20x4.

Required:
1. Briefly explain how an activity-based costing system operates.
2. Using activity-based costing, determine if Queensland Electronics should continue to emphasize the Zodiac model and phase out the Novelle model.
(CMA,adapted)

QUEENSLAND ELECTRONICS COMPANY Income Statement For The Year Ended December 31, 20x4 Zodiac Novelle Total Sales $4,640,000 $20,020,000 $24,660,000 Cost of goods sold 3,232,000 13,024,000 16,256,000 Gross margin . $1,408,000 $ 6,996,000 $ 8,404,000 Selling and administrative expenses 980,000 5,700,000 6,680,000 $ 428,000 $ 1,296,000 $ 1,724,000 Net income Units produced and sold 4,000 22,000 Net income per unit sold 107.00 $ 58.91* "Rounded.