Salem Electronics currently produces two products: a programmable calculator and a tape recorder. A recent marketing study indicated that consumers would react favorably to a radio with the Salem brand name. Owner Kenneth Booth was interested in the possibility. Before any commitment was made, however, Kenneth wanted to know what the incremental fixed costs would be and how many radios must be sold to cover these costs. In response, Betty Johnson, the marketing manager, gathered data for the current products to help in projecting overhead costs for the new product. The overhead costs based on 30,000 direct labor hours follow. (The high-low method using direct labor hours as the independent variable was used to determine the fixed and variable costs.) Fixed Variable Materials handling $ - $18,000 Power 22,000 Engineering 100,000 Machine costs 30,000 80,000 Inspection 40,000 Setups 60,000 *All depreciation. The following activity data were also gathered: Calculators Recorders Units produced 20,000 20,000 Direct labor hours 10,000 20,000 Machine hours 10,000 10,000 Material moves 120 120 Kilowatt-hours 1,000 1,000 Engineering hours 1,000 4,000 700 Hours of inspection 1,400 Number of setups 40 Betty was told that a plantwide overhead rate was used to assign overhead costs based on direct labor hours. She was also informed by engineering that if 20,000 radios were produced and sold (her projection based on her marketing study), they would have the same activity data as the recorders (use the same direct labor hours, machine hours, setups, and so on). Engineering also provided the following additional estimates for the proposed product line: Prime costs per unit $18 Depreciation on new equipment 18,000 Upon receiving these estimates, Betty did some quick calculations and became quite excited. With a selling price of $26 and just $18,000 of additional fixed costs, only 4,500 units had to be sold to break even. Since Betty was confident that 20,000 units could be sold, she was prepared to strongly recommend the new product line. Required: 1. Reproduce Betty's break-even calculation using conventional cost assignments. Variable overhead rate: $ 4 per direct labor hour Unit variable cost: $ 22 Break-even: 4,500 units How much additional profit would be expected under this scenario, assuming that 20,000 radios are sold? $ 62,000 2. Use an activity-based costing approach, and calculate the break-even point and the incremental profit that would be earned on sales of 20,000 units. In your computation for break-even point, round amounts to the nearest cent and round your final answer to the nearest whole unit. In your analysis assume that the expected engineering hours, inspection hours, and setups are realized and that depreciation is a fixed cost. Break-even point 20,934 units Incremental profit (loss) $ 439,600 X Loss Salem Electronics currently produces two products: a programmable calculator and a tape recorder. A recent marketing study indicated that consumers would react favorably to a radio with the Salem brand name. Owner Kenneth Booth was interested in the possibility. Before any commitment was made, however, Kenneth wanted to know what the incremental fixed costs would be and how many radios must be sold to cover these costs. In response, Betty Johnson, the marketing manager, gathered data for the current products to help in projecting overhead costs for the new product. The overhead costs based on 30,000 direct labor hours follow. (The high-low method using direct labor hours as the independent variable was used to determine the fixed and variable costs.) Fixed Variable Materials handling $ - $18,000 Power 22,000 Engineering 100,000 Machine costs 30,000 80,000 Inspection 40,000 Setups 60,000 *All depreciation. The following activity data were also gathered: Calculators Recorders Units produced 20,000 20,000 Direct labor hours 10,000 20,000 Machine hours 10,000 10,000 Material moves 120 120 Kilowatt-hours 1,000 1,000 Engineering hours 1,000 4,000 700 Hours of inspection 1,400 Number of setups 40 Betty was told that a plantwide overhead rate was used to assign overhead costs based on direct labor hours. She was also informed by engineering that if 20,000 radios were produced and sold (her projection based on her marketing study), they would have the same activity data as the recorders (use the same direct labor hours, machine hours, setups, and so on). Engineering also provided the following additional estimates for the proposed product line: Prime costs per unit $18 Depreciation on new equipment 18,000 Upon receiving these estimates, Betty did some quick calculations and became quite excited. With a selling price of $26 and just $18,000 of additional fixed costs, only 4,500 units had to be sold to break even. Since Betty was confident that 20,000 units could be sold, she was prepared to strongly recommend the new product line. Required: 1. Reproduce Betty's break-even calculation using conventional cost assignments. Variable overhead rate: $ 4 per direct labor hour Unit variable cost: $ 22 Break-even: 4,500 units How much additional profit would be expected under this scenario, assuming that 20,000 radios are sold? $ 62,000 2. Use an activity-based costing approach, and calculate the break-even point and the incremental profit that would be earned on sales of 20,000 units. In your computation for break-even point, round amounts to the nearest cent and round your final answer to the nearest whole unit. In your analysis assume that the expected engineering hours, inspection hours, and setups are realized and that depreciation is a fixed cost. Break-even point 20,934 units Incremental profit (loss) $ 439,600 X Loss