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Please provide the calculation for each of Indirect costs. P5-42 (algo) Prime Electronics, a division of Boston Corporation, manufactures two large-screen television models: the Mammoth,
Please provide the calculation for each of Indirect costs.
P5-42 (algo) Prime Electronics, a division of Boston Corporation, manufactures two large-screen television models: the Mammoth, which has been produced since 2013 and sells for $991, and the Maximum, a newer model introduced in early 2015 that sells for $1.294. (Click the icon to view additional information.) Prime's controller, Seth Johnson, is advocating the use of activity-based costing and activity-based management and has gathered information about the company's manufacturing overhead costs for the year ended November 30, 2017. After completing his analysis, Johnson shows the results to Carl Carter, the Prime division president. (Click the icon to view the ABC data.) A (Click the icon to view Carter's response.) Read the requirements. Requirement 1. Using activity-based costing, calculate the gross margin per unit of the Maximum and Mammoth models. Begin by calculating the total cost of goods sold for each model. (Round intermediary calculations to the nearest cent.) Mammoth Direct costs Direct materials Direct manufacturing labor Machine costs Total direct costs Indirect costs Soldering Indirect costs Soldering Shipments Quality control Purchase orders Machine power Machine setups Total indirect costs Total cost of goods sold i X More Info Based on the following income statement for the year ended November 30, 2017, senior management at Boston have decided to concentrate Prime's marketing resources on the Maximum model and to begin to phase out the Mammoth model because Maximum generates a much bigger operating income per unit. Prime Electronics Income Statement for the Fiscal Year Ended November 30, 2017 Mammoth Maximum Total Revenues $ 23,784,000 $ 7,764,000 $ 31,548,000 Cost of goods sold 14,983,200 5,278,200 20,261,400 Gross margin 8,800,800 2,485,800 11,286,600 Selling and administrative expense 5,946,000 1,552,800 7,498,800 Operating income 2,854,800 $ 933,000 $ 3,787,800 Units produced and sold 24,000 6,000 Operating income per unit sold $ 118.95 $ 155.50 Details for cost of coods sold for Mammoth and Maximum are as follows: X More Info Operating income per unit sold $ 118.95 $ 155.50 Details for cost of goods sold for Mammoth and Maximum are as follows: Mammoth Maximum Total Per Unit Total Per Unit Direct materials 5,474,400 $ 228.10 $ 3,858,600 $ 643.10 Direct manufacturing labor (a) 504,000 21.00 294,000 49.00 Machine costs 3,724,800 155.20 (b) 465,600 77.60 Total direct costs $ 9,703,200 $ 404.30 $ 4,618,200 $ 769.70 Manufacturing overhead costs (c) 5,280,000 220.00 660,000 110.00 $ 14,983,200 $ 624.30 $ 5,278,200 $ 879.70 Total cost of goods sold (a) Mammoth requires 1.5 hours per unit and Maximum requires 3.5 hours per unit. The direct manufacturing labor cost is $14.00 per hour. (b) Machine costs include lease costs of the machine, repairs, and maintenance. Mammoth requires 8 machine-hours per unit and Maximum requires 4 machine-hours per unit. The machine-hour rate is $19.40 per hour. (c) Manufacturing overhead costs are allocated to products based on machine-hours at the rate of $27.50 per hour. Activity Center (Cost-Allocation Base) Total Activity Costs Soldering (number of solder points) $ 1,065,000 Shipments (number of shipments) 1,261,000 Quality control (number of inspections) 1,141,000 Purchase orders (number of orders) 1,170,000 Machine power (machine-hours) 57,000 Machine setups (number of setups) 1,246,000 5,940,000 Total manufacturing overhead Units of the Cost-Allocation Base Mammoth Maximum Total 1,140,000 280,000 1,420,000 16,600 9,400 26,000 51,100 18,900 70,000 85,600 109,400 175,600 14,400 190,000 195,000 16,100 18,900 35,000 Carter does not like what he sees. "If you show headquarters this analysis, they are going to ask us to phase out the Maximum line, which we have just introduced. This whole costing stuff has been a major problem for us. First Mammoth was not profitable and now Maximum. "Looking at the ABC analysis, I see two problems. First, we do many more activities than the ones you have listed. If you had included all activities, maybe your conclusions would be different. Second, you used number of setups and number of inspections as allocation bases. The numbers would be different had you used setup-hours and inspection-hours instead. I know that measurement problems precluded you from using these other cost-allocation bases, but I believe you ought to make some adjustments to our current numbers to compensate for these issues. I know you can do better. We can't afford to phase out either product." Johnson knows that his numbers are fairly accurate. As a quick check, he calculates the profitability of Maximum and Mammoth using more and different allocation bases. The set of activities and activity rates he had used results in numbers that closely approximate those based on more detailed analyses. He is confident that headquarters, knowing that Maximum was introduced only recently, will not ask Prime to phase it out. He is also aware that a sizable portion of Carter's bonus is based on division revenues. Phasing out either product would adversely affect his bonus. Still, he feels some pressure from Carter to do something. 1. Using activity-based costing, calculate the gross margin per unit of the Maximum and Mammoth models. 2. Explain briefly why these numbers differ from the gross margin per unit of the Maximum and Mammoth models calculated using Prime's existing simple costing system 3. Comment on Carter's concerns about the accuracy and limitations of ABC. 4. How might Prime find the ABC information helpful in managing its business? 5. What should Seth Johnson do in response to Carter's commentsStep by Step Solution
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