Question
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
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.
NT Electronics
Income Statement for the year ended 30 November 2020
| 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 |
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Unit Cost for Croc and Kanga are as follows:
| Croc ($) | Kanga ($) |
Direct Materials | 208 | 584 |
Direct Labour |
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Croc (1.5hours x 12) | 18 |
|
Kanga (3.5hours x 12) |
| 42 |
Machine Cost |
|
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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 $25 per hour.
NT Electronics financial controller, Susan Benzo, is advocating the use of activity-based costing and activity-based management and has gathered the following information about the companys manufacturing overhead cost for the year ended 30 November 2020.
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| Units of the Cost Allocation base | ||
Activity Centre | Total Activity Costs ($) | 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 |
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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.
Required:
- Using activity based costing; calculate the profitability of the Croc and Kanga models.
- Explain why these numbers differ from the profitability of the Croc and Kanga models calculated using the existing simple costing system.
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