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Schultz Electronics manufactures two ultra high-definition television models: the Royale which sells for $1,530, and a new model, the Majestic, which sells for $1,270. The

Schultz Electronics manufactures two ultra high-definition television models: the Royale which sells for $1,530, and a new model, the Majestic, which sells for $1,270. The production cost computed per unit under traditional costing for each model in 2020 was as follows.

Traditional Costing

Royale

Majestic

Direct materials

$640

$400

Direct labor ($20 per hour)

120

100

Manufacturing overhead ($41 per DLH)

246

205

Total per unit cost

$1,006

$705

In 2020, Schultz manufactured 25,000 units of the Royale and 10,000 units of the Majestic. The overhead rate of $41 per direct labor hour was determined by dividing total estimated manufacturing overhead of $8,114,400 by the total direct labor hours (200,000) for the two models. Under traditional costing, the gross profit on the models was Royale $524 ($1,530 $1,006) and Majestic $565 ($1,270 $705). Because of this difference, management is considering phasing out the Royale model and increasing the production of the Majestic model. Before finalizing its decision, management asks Schultzs controller to prepare an analysis using activity-based costing (ABC). The controller accumulates the following information about overhead for the year ended December 31, 2020.

Activity Cost Pools

Cost Drivers

Estimated Overhead

Estimated Use of Cost Drivers

Activity-Based Overhead Rate

Purchasing Number of orders $1,299,200 40,600 $32/order
Machine setups Number of setups 1,067,000 19,400 $55/setup
Machining Machine hours 5,035,800 119,900 $42/hour
Quality control Number of inspections 712,400 27,400 $26/inspection

The cost drivers used for each product were:

Cost Drivers

Royale

Majestic

Total

Purchase orders 17,000 23,600 40,600
Machine setups 6,000 13,400 19,400
Machine hours 75,000 44,900 119,900
Inspections 11,000 16,400 27,400

1) Assign the total 2020 manufacturing overhead costs to the two products using activity-based costing (ABC) and determine the overhead cost per unit.

2) Calculate the cost per unit of each model using ABC costing

3) Calculate gross profit of each model using ABC costing

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