NT Electronics manufactures two LCD screen television models: The Croc, which has been produced since 2015 and sells for $900, and the Kanga a newer model introduced since 2019 and sells for $1140. Based on the following income statement for the year ended 30 November 2020, senior management at NT Electronics have decided to concentrate marketing resources on the Kanga model and to begin to phase out the Croc model.

Croc $

Kanga $

Total $

Revenues

19,800,000

4,560,000

24,360,000

Cost of Goods Sold

12,540,000

3,192,000

15,732,000

Gross Margin

7,260,000

1,368,000

8,628,000

Selling and Admin Expenses

5,830,000

978,000

6,808,000

Operating Profit

1,430,000

390,000

1,820,000

Units Produced and Sold

22,000

4,000

Net Income per unit sold

65.00

97.50

NT Electronics financial controller, Susan Benzo, is advocating the use of activity-based costing and activity-based management and has gathered the following information about the company's manufacturing overhead cost for the year ended 30 November 2020.

Units of the Cost Allocation base

Activity Centre

Total Activity Costs ($)

Croc

Kanga

Total

Soldering (number of points)

942,000

1,185,000

385,000

1,570,000

Shipments (number)

860,000

16,200

3,800

20,000

Quality Control (number)

1,240,000

56,200

21,300

77,500

Purchase Orders (number)

950,4000

80,100

109,980

190,080

Machine Power (machine-hours)

57,600

176,000

16,000

192,000

Machine set-ups (number)

750,000

16,000

14,000

30,000

Total manufacturing overhead

4,800,000

Croc ($)

Kanga ($)

Direct Materials

208

584

Direct Labour

Croc (1.5hours x 12)

18

Kanga (3.5hours x 12)

42

Machine Cost

Croc (8hours x 18)

144

Kanga (4hours x 18)

72

Manufacturing Overhead other than Machine cost

200

100

Total Cost

570

798

Manufacturing overhead was allocated to products based on machine hours at the rate of $25 per hour.

After completing her analysis, Benzo shows the results to Fred Duval, NT Electronics managing director. Duval does not like what he sees. Fred argues that the company engages in many other activities and they have not been included and that activity based costing is too complex, expensive and time consuming. He further argues that activity based costing is irrelevant to a small company with a small range of products like NT Electronics.

a.Using activity based costing; calculate the profitability of the Croc and Kanga models.

b.Explain why these numbers differ from the profitability of the Croc and Kanga models calculated using the existing simple costing system.

a.Calculate how many units of Croc NT Electronics must produce to ensure that it does not make a loss.

b.If the company intends to make a total profit of $4,000,000 for the year, how many units should NT Electronics produce?

c.The company is considering purchasing a new machine that would increase fixed costs by $1,600,000 but reduce machine costs by 50%. Based on the current production volume of 22,000 units should the company go ahead with the proposal (i.e., would the company's profit increase.