Montreal electronic company manufactures two large$-$screen television models: the Nova which has been produced for $10$ years and sells for $$900,$ and the Royal, a new model introduced in early $20$x$0,$ which sells for $$1,140.$ Based on the following income statement for $20$x$1,$ a decision has been made to concentrate Montreal$$s marketing resources on the Royal model and to begin to phase out the Nova model.

MONTREAL ELECTRONICS COMPANY Income statement For the year ended December $31,20$x$1$

Royal

Nova

Total

Sales

$$4,560,000$

$$19,800,000$

$$24,360,000$

Cost of Goods sold

$$3,192,000$

$$12,540,000$

$$15,732,000$

Gross margin

$$1,368,000$

$$7,260,000$

$$8,628,000$

Selling and administrative expenses

$$978,000$

$$5,830,000$

$$6,808,000$

Net income

$$390,000$

$$1,430,000$

$$1,820,000$

Units produced and sold

$4,000$

$22,000$

Net income per unit sold

$$97\mathrm{.}50$

$$65\mathrm{.}00$

The standard unit costs for the Royal and Nova models are as follows:

Royal

Nova

Direct material

$$584$

$$208$

Direct labor:

Royal $(3\mathrm{.}5$ hr$.$ x $$12)$

$42$

Nova $(1\mathrm{.}5$ hr$.$ x $$12)$

$18$

Machine Usage:

Royal $(4$ hr$.$ x $$18)$

$72$

Nova $(8$ hr$.$ x $$18)$

$144$

Manufacturing overhead$*$

$100$

$200$

Standard cost

$$798$

$$570$

$*$Manufacturing overhead was applied on the basis of machine hours at a predetermined rate of $$25$ per hour.

Montreal 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 $20$x$1.$

Number of Events

Activity Centre $($Cost drivers$)$

Traceable Cost

Royal

Nova

Total

Soldering $($number of solder joints$)$ $

$9,42,000$

$3,85,000$

$11,85,000$

$15,70,000$

Shipments $($number of shipments$)$

$8,60,000$

$3,800$

$16,200$

$20,000$

Quality Control $($number of inspections$)$

$12,40,000$

$21,300$

$56,200$

$77,500$

Purchase Orders $($number of orders$)$

$9,50,400$

$1,09,980$

$80,100$

$1,90,080$

Machine power $($machine hours$)$

$57,600$

$16,000$

$1,76,000$

$1,92,000$

Machine setups $($number of setups$)$

$7,50,000$

$14,000$

$16,000$

$30,000$

Total traceable costs

$$4,800,000$

Required:

Briefly explain how an activity$-$based costing system operates.

Using activity$-$based costing, determine if Montreal Electronics should continue to emphasize the Royal model and phase out the Nova model.