Jacobson Electronics manufactures two HD television models: the Royale, which sells for $1,400, and a new model, the Majestic, which sells for $1,100. The production costs calculated per unit under traditional costing for each model in 2020 were as follows:

Traditional Costing

Royale

Majestic

Direct materials

$600

$320

Direct labour ($20 per hour)

100

80

Manufacturing overhead ($35 per direct labour hour)

175

140

Total per-unit cost

$875

$540

In 2020, Jacobson manufactured 20,000 units of the Royale and 10,000 units of the Majestic. The overhead rate of $35 per direct labour hour was determined by dividing total estimated manufacturing overhead of $4.9 million by the total direct labour hours (140,000) for the two models.

Under traditional costing, the gross profit on the models was $525 for the Royale (or $1,400 $875), and $560 for the Majestic (or $1,100 $540). Because of this difference, management is considering phasing out the Royale model and increasing the production of the Majestic model.

Before finalizing its decision, management asks Jacobson's controller to make an analysis using activity-based costing (ABC). The controller accumulates the following information about overhead for the year ended December 31, 2020:

Activity Cost Pools

Cost Drivers

Estimated Overhead

Estimated Use of Cost Drivers

Activity-Based Overhead Rate

Purchasing

Number of orders

$750,000

25,000

$30 per order

Machine set-ups

Number of set-ups

600,000

20,000

30 per set-up

Machining

Machine hours

3,100,000

100,000

31 per hour

Quality control

Number of inspections

450,000

5,000

90 per inspection

The cost drivers used for each product were as follows:

Instructions

a.

Assign the total 2020 manufacturing overhead costs to the two products using activity-based costing (ABC).

a. Royale $2,080,000

b.

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

b. Cost/unitRoyale $804

c.

Are management's future plans for the two models sound? Explain.