overhead tO tU b. Determine the unit product 3. Explain why overhead cost shifted from CASE 7A-6 Contrasting Activity-Based Costing and Traditional Costing LO2, LO3, LO4, LO6 Wow! Is that R-92 model ever a loser! It's time to cut back its production and resources toward the new T-95 model," said Graham Thomas, executive vice Thomas Products Inc. Just look at this income statement Ive received from acco T 95 is generating over eight times as much profit as the R-92 on one-sixth of the ung. The convinced that our future depends on the T-95." The year-end statement to which e rm referring is shown belo uct under ABC vice-president of Thomas was Model Total 9,000,000 5490,000 3,510000 3450,000 60,000 30,000 $2125,000 Sales Cost of goods sold Gross margin Less selling and administrative expenses $11,125,000 6900,000 225,000 3,675,000 550,000 715,000 225000 $490000 income Number of units produced and sold The numbers sure look that way replied Julie Williams, the company's sales manager. But why isn't the competition more excited about the T-95? I know we've been producing the model for only three years, but I'm surprised that more of our competitors haven't recognized what a cash cow it is. 1 think it's our new automated plant," replied Thomas. "Now it takes only two direct labour-hours to produce a unit of the R-92 and three direct labour-hours to produce a unit of the T-95. That's considerably less than it used to take us I agree that automation is wonderful," replied Williams. "I suppose that's how were able to hold down the price of the T-95. Taylor Company in England tried to bring out a T-95 but disco ered they couldn't touch our price. But Taylor is killing us on the R-92 by undercutting our price with some of our best customers. I suppose they'll pick up all of our R-92 business if we move out that market. But who cares? We don't even have to advertise the T-95: it just seems to sell itself My only concern about automation is how our manufacturing overhead rate has shot up said Thomas. 'Our total manufacturing overhead cost is $2.700,000. That comes out to be a hefty amount per direct labour-hour, but Dianne down in accounting has been using direct labour-hours as the base for computing overhead rates for years and doesn't want to change don't suppose it matters as long as costs get assigned to products." 've never understood that debit and credit stuff" replied Williams. "But I think you've got a problem in production. I had lunch with Janet, our plant manager yesterday and she com plained about how complex the T-95 is to produce. Apparently they have to do a lot of setups. pecial soldering and other work on the T-95 just to keep production moving. And to inspect every single unit." st to keep production moving. And they have It'll have to wait, said Thomas. Tm writing a proposal to the board of directors to P out the R-92. We've got to increase our bottom line or we'll all be looking for jobs ting a proposal to the board of directors to phase Required