Requirement 1. Using activity-based costing, calculate the gross margin per unit of the Maximum and Mammoth mode Begin by calculating the total cost of goods sold for each model. (Round intermediary calculations to the nearest cent.) Mammoth Maximum Direct costs Direct materials Direct manufacturing labour Machine costs Total direct costs Indirect costs Soldering Shipments Quality control Purchase orders Machine power Machine setups Total indirect costs Total cost of goods sold Now calculate the total gross margin and gross margin per unit for each model using activity-based costing. (Round the per unit amounts to the nearest cent.) Mammoth Maximum Gross margin-total Gross margin per unit Requirement 2. Explain briefly why these numbers differ from the gross margin per unit of the Maximum and Mammoth models calculated using Preston's existing simple costing system. Preston's simple costing system allocates all manufacturing overhead other than machine costs on the basis of Consequently, the per unit that a product needs, the the manufacturing overhead allocated to it using the simple costing system. Because Mammoth per unit compared to Maximum, amount of manufacturing overhead is allocated to Mammoth. The ABC system recognizes Maximum's use of manufacturing overhead and results in Maximum showing amount of manufacturing overhead is allocated to Mammoth. The ABC system recognizes Maximum's profitability. By the same token, the ABC analysis shows that Mammoth is profitable. The simple costing system V use of manufacturing overhead and results in Maximum showing Mammoth and so made it appear profitable. Requirement 3. Comment on Campo's concerns about the accuracy and limitations of ABC. (Select all that apply.) A. Adding more activities would have no impact on the complexity of the system and should be inexpensive to implement. It would not necessarily improve the accuracy of cost information and therefore may not improve decision making. B. Campo's comments about ABC implementation are not valid. C. When designing and implementing ABC systems, it is not necessary for managers and management accountants to trade off the costs of the system against its benefits. D. When designing and implementing ABC systems, managers and management accountants need to trade off the costs of the system against its benefits. E. Using inspection-hours and setup-hours as allocation bases would probably not lead to more accurate cost information and would also have no effect on measurement costs. OF. Using inspection-hours and setup-hours as allocation bases would also probably lead to more accurate cost information, but it would increase measurement costs. G. Campo's comments about ABC implementation are valid. H. Adding more activities would make the system harder to understand and more costly to implement, but it would probably improve the accuracy of cost information, which in turn, would help Preston make better decisions. Requirement 4. How might Preston find the ABC information helpful in managing its business? (Select all that apply.) A. For the long term, activity-based costing can assist management in making decisions regarding the productivity of the employees. B. Activity-based management (ABM) is a management system where each component in a production line is manufactured only when it is needed in the next step of the process. C. ABM highlights possible improvements including reduction or elimination of non-value-added activities, selecting lower cost activities, sharing activities with other products, and eliminating waste. OD. ABM is an integrated approach that focuses management's attention on activities with the ultimate aim of continuous improvement E. ABM is an integrated approach that focuses management's attention on analyzing the direct costs incurred in the manufacturing process with the ultimate aim of cost reduction. F. Activity-based management (ABM) the use of information from activity-based costing to make improvements in a firm. G. For the long term, activity-based costing can assist management in making decisions regarding the viability of product lines, distribution channels, marketing strategies, etc. H. As a whole-company philosophy, ABM focuses on strategic, as well as tactical and operational, activities of the company. I. Activity-based management is an integrative philosophy of management for continuously improving the quality of products and processes by focusing primarily on the direct labour costs. Requirement 5. What should Seth Jackman do in response to Campo's comments? (Select all that apply.) In assessing the situation, first consider the "Standards of Ethical Conduct for Management Accountants" that could potentially be violated in this situation. A. Competence B. Integrity c. Confidentiality D. Credibility E. None of the standards are potentially violated in this situation. What should Seth Jackman do in response to Campo's comments? O A. Incorrect reporting of ABC costs with the goal of retaining both the Mammoth and Maximum product lines is unethical. Jackman should indicate to Campo that the product cost calculations are, indeed, appropriate. If Campo still insists on modifying the product cost numbers, Jackman should raise the matter with one of Campo's superiors. If, after taking all these steps, there is continued pressure to modify product cost numbers, Jackman should consider resigning from the company rather than engage in unethical behaviour. OB. Incorrect reporting of ABC costs with the goal of retaining both the Mammoth and Maximum product lines is unethical. Jackman should indicate to Campo that the product cost calculations are indeed, appropriate. If Campo still insists on modifying the product cost numbers, Jackman is not obligated to take any further action because Campo is his superior. C. Incorrect reporting of ABC costs with the goal of retaining both the Mammoth and Maximum product lines is ethical. Jackman has the obligation to follow the wishes of his immediate supervisor. Raising the matter with one of Campo's superiors would be unethical. OD. Incorrect reporting of ABC costs with the goal of retaining both the Mammoth and Maximum product lines is not unethical as the information i based on estimates rather than historical data. Once the information is communicated to Campo, Jackman is not obligated to take any further action. Activity Centre (Cost-Allocation Base) Total Activity Costs Soldering (number of solder points) $ 1,113,000 Shipments (number of shipments) 1,001,000 Quality control (number of inspections) 1,348,500 Purchase orders (number of orders) 951,000 Machine power (machine-hours) 48,000 Machine setups (number of setups) 1,038,500 5,500,000 Total manufacturing overhead Units of the Cost-Allocation Base Mammoth Maximum Total 1,110,000 480,000 1,590,000 16,500 5,500 22,000 56,500 21,000 77,500 81,100 109,100 190,200 173,400 18,600 192,000 16,300 14,700 31,000 Based on the following income statement for the year ended November 30, 2017, senior management at Boisvert have decided to concentrate Preston'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. Preston Electronics Income Statement for the Fiscal Year Ended November 30, 2017 Mammoth Maximum Total Revenues $ 22,034,000 $ 5,240,000 $ 27,274,000 Cost of goods sold 14,326,700 3,511,600 17,838,300 Gross margin 7,707,300 1,728,400 9,435,700 Selling and administrative expense 5,508,500 1,048,000 6,556,500 $ Operating income 2,198,800 $ 2,879,200 680,400 $ Units produced and sold 23,000 4,000 Operating income per unit sold $ 95.60 $ 170.10 Details for cost of goods sold for Mammoth and Maximum are as follows. Mammoth Maximum Per Unit Per Unit 228.30 $ 642.10 Total 2,568,400 $ 196,000 307,200 49.00 Total 5,250,900 $ 483,000 3,532,800 9,266,700 $ 5,060,000 14,326,700 $ 21.00 153.60 76.80 Direct materials Direct manufacturing labour (a) Machine costs (6) Total direct costs Manufacturing overhead costs (c) Total cost of goods sold $ 402.90 $ 767.90 3,071,600 $ 440,000 220.00 110.00 $ 622.90 $ 3,511,600 $ 877.90 (a) Mammoth requires 1.5 hours per unit and Maximum requires 3.5 hours per unit. The direct manufacturing labour 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 $19.20 per hour. (c) Manufacturing overhead costs are allocated to products based on machine-hours at the rate of $27.50 per hour. Campo's response Campo 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." Jackman 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 Preston to phase it out. He is also aware that a sizable portion of Campo's bonus is based on division revenues. Phasing out either product would adversely affect his bonus. Still, he feels some pressure from Campo to do something. Requirement 1. Using activity-based costing, calculate the gross margin per unit of the Maximum and Mammoth mode Begin by calculating the total cost of goods sold for each model. (Round intermediary calculations to the nearest cent.) Mammoth Maximum Direct costs Direct materials Direct manufacturing labour Machine costs Total direct costs Indirect costs Soldering Shipments Quality control Purchase orders Machine power Machine setups Total indirect costs Total cost of goods sold Now calculate the total gross margin and gross margin per unit for each model using activity-based costing. (Round the per unit amounts to the nearest cent.) Mammoth Maximum Gross margin-total Gross margin per unit Requirement 2. Explain briefly why these numbers differ from the gross margin per unit of the Maximum and Mammoth models calculated using Preston's existing simple costing system. Preston's simple costing system allocates all manufacturing overhead other than machine costs on the basis of Consequently, the per unit that a product needs, the the manufacturing overhead allocated to it using the simple costing system. Because Mammoth per unit compared to Maximum, amount of manufacturing overhead is allocated to Mammoth. The ABC system recognizes Maximum's use of manufacturing overhead and results in Maximum showing amount of manufacturing overhead is allocated to Mammoth. The ABC system recognizes Maximum's profitability. By the same token, the ABC analysis shows that Mammoth is profitable. The simple costing system V use of manufacturing overhead and results in Maximum showing Mammoth and so made it appear profitable. Requirement 3. Comment on Campo's concerns about the accuracy and limitations of ABC. (Select all that apply.) A. Adding more activities would have no impact on the complexity of the system and should be inexpensive to implement. It would not necessarily improve the accuracy of cost information and therefore may not improve decision making. B. Campo's comments about ABC implementation are not valid. C. When designing and implementing ABC systems, it is not necessary for managers and management accountants to trade off the costs of the system against its benefits. D. When designing and implementing ABC systems, managers and management accountants need to trade off the costs of the system against its benefits. E. Using inspection-hours and setup-hours as allocation bases would probably not lead to more accurate cost information and would also have no effect on measurement costs. OF. Using inspection-hours and setup-hours as allocation bases would also probably lead to more accurate cost information, but it would increase measurement costs. G. Campo's comments about ABC implementation are valid. H. Adding more activities would make the system harder to understand and more costly to implement, but it would probably improve the accuracy of cost information, which in turn, would help Preston make better decisions. Requirement 4. How might Preston find the ABC information helpful in managing its business? (Select all that apply.) A. For the long term, activity-based costing can assist management in making decisions regarding the productivity of the employees. B. Activity-based management (ABM) is a management system where each component in a production line is manufactured only when it is needed in the next step of the process. C. ABM highlights possible improvements including reduction or elimination of non-value-added activities, selecting lower cost activities, sharing activities with other products, and eliminating waste. OD. ABM is an integrated approach that focuses management's attention on activities with the ultimate aim of continuous improvement E. ABM is an integrated approach that focuses management's attention on analyzing the direct costs incurred in the manufacturing process with the ultimate aim of cost reduction. F. Activity-based management (ABM) the use of information from activity-based costing to make improvements in a firm. G. For the long term, activity-based costing can assist management in making decisions regarding the viability of product lines, distribution channels, marketing strategies, etc. H. As a whole-company philosophy, ABM focuses on strategic, as well as tactical and operational, activities of the company. I. Activity-based management is an integrative philosophy of management for continuously improving the quality of products and processes by focusing primarily on the direct labour costs. Requirement 5. What should Seth Jackman do in response to Campo's comments? (Select all that apply.) In assessing the situation, first consider the "Standards of Ethical Conduct for Management Accountants" that could potentially be violated in this situation. A. Competence B. Integrity c. Confidentiality D. Credibility E. None of the standards are potentially violated in this situation. What should Seth Jackman do in response to Campo's comments? O A. Incorrect reporting of ABC costs with the goal of retaining both the Mammoth and Maximum product lines is unethical. Jackman should indicate to Campo that the product cost calculations are, indeed, appropriate. If Campo still insists on modifying the product cost numbers, Jackman should raise the matter with one of Campo's superiors. If, after taking all these steps, there is continued pressure to modify product cost numbers, Jackman should consider resigning from the company rather than engage in unethical behaviour. OB. Incorrect reporting of ABC costs with the goal of retaining both the Mammoth and Maximum product lines is unethical. Jackman should indicate to Campo that the product cost calculations are indeed, appropriate. If Campo still insists on modifying the product cost numbers, Jackman is not obligated to take any further action because Campo is his superior. C. Incorrect reporting of ABC costs with the goal of retaining both the Mammoth and Maximum product lines is ethical. Jackman has the obligation to follow the wishes of his immediate supervisor. Raising the matter with one of Campo's superiors would be unethical. OD. Incorrect reporting of ABC costs with the goal of retaining both the Mammoth and Maximum product lines is not unethical as the information i based on estimates rather than historical data. Once the information is communicated to Campo, Jackman is not obligated to take any further action. Activity Centre (Cost-Allocation Base) Total Activity Costs Soldering (number of solder points) $ 1,113,000 Shipments (number of shipments) 1,001,000 Quality control (number of inspections) 1,348,500 Purchase orders (number of orders) 951,000 Machine power (machine-hours) 48,000 Machine setups (number of setups) 1,038,500 5,500,000 Total manufacturing overhead Units of the Cost-Allocation Base Mammoth Maximum Total 1,110,000 480,000 1,590,000 16,500 5,500 22,000 56,500 21,000 77,500 81,100 109,100 190,200 173,400 18,600 192,000 16,300 14,700 31,000 Based on the following income statement for the year ended November 30, 2017, senior management at Boisvert have decided to concentrate Preston'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. Preston Electronics Income Statement for the Fiscal Year Ended November 30, 2017 Mammoth Maximum Total Revenues $ 22,034,000 $ 5,240,000 $ 27,274,000 Cost of goods sold 14,326,700 3,511,600 17,838,300 Gross margin 7,707,300 1,728,400 9,435,700 Selling and administrative expense 5,508,500 1,048,000 6,556,500 $ Operating income 2,198,800 $ 2,879,200 680,400 $ Units produced and sold 23,000 4,000 Operating income per unit sold $ 95.60 $ 170.10 Details for cost of goods sold for Mammoth and Maximum are as follows. Mammoth Maximum Per Unit Per Unit 228.30 $ 642.10 Total 2,568,400 $ 196,000 307,200 49.00 Total 5,250,900 $ 483,000 3,532,800 9,266,700 $ 5,060,000 14,326,700 $ 21.00 153.60 76.80 Direct materials Direct manufacturing labour (a) Machine costs (6) Total direct costs Manufacturing overhead costs (c) Total cost of goods sold $ 402.90 $ 767.90 3,071,600 $ 440,000 220.00 110.00 $ 622.90 $ 3,511,600 $ 877.90 (a) Mammoth requires 1.5 hours per unit and Maximum requires 3.5 hours per unit. The direct manufacturing labour 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 $19.20 per hour. (c) Manufacturing overhead costs are allocated to products based on machine-hours at the rate of $27.50 per hour. Campo's response Campo 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." Jackman 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 Preston to phase it out. He is also aware that a sizable portion of Campo's bonus is based on division revenues. Phasing out either product would adversely affect his bonus. Still, he feels some pressure from Campo to do something