Sutcliffe Electronies Sutcliffe Electronics, a division of Best Corporation, manufactures two large-screen television models, the Mammoth, which has been produced since 2015, and sells for $990, and the Maximum, a newer model introduced in 2016 that sells for $1,254. Based on the following income statement for the year ended November 30, 2019, senior management at Best Corporation has decided to concentrate Sutcliffe'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 Sutcliffe Electronics Income Statement for the Fiscal Year Ended November 30, 2019 Mammoth ximum Total Revenue $21,780,000 13,794,000 7,986,000 6,413,000 $1,573,000 22,000 $71.50 $5,016,000 3,511,200 1,504,800 1,075,800 $429,000 4,000 $107.25 $26,796,000 17,305,200 9,490,800 7,488,800 2002,000 Cost of Goods Sold. Gross Margin Selling and Admin. Operating Income Units produced and sold Operating Income per unit sold Details of cost of goods sold for Mammoth and Maximum are as follows Mammoth ximum Total Total Per Unit Per Unit $5,033,600 435,600 3,484,800 $8,954,000 $4,840,000 $13,794,000 $2,569,600 184,800 316,800 $3,071,200 $440,000 $3,511,200 Direct Materials Direct Mfg. Labor Machine Costs Total Direct Costs $228.80 $642.40 46.20 19.80 158.40 79.20 $407.00 $767.80 osts Total COGS $220,00 $1 10.00 $877.80 $627,00 Mammoth requires 1.5 hours per unit and Maximum requires 3.5 hours per unit. The direct manufacturing labor cost is $13.20 per hour a bMachine 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 $19.80 per hour cManufacturing overhead costs are allocated to products based on machine-hours at a rate of $27.50 per hour Sutcliffe's controller, Colin Hanton, is advocating the use of activity-based costing and activity-based management and has gathered the following information about the company's manufacturing overhead costs for the year ended November 30, 2019: Units of the Cost Allocation Base Allocation Center Total Activity Costs Mammoth Maximum Total (Cost Allocation Base) Soldering (number of solder points) Shipments (number of shipments) Quality control (number of inspections) Purchase orders $1,036,200 390,000 1,180,000 1,570,000 946,000 15,800 4,200 20,000 77,500 1,364,000 56,700 20,800 1,045,440 79,800 110,280 190,080 (number of orders) Machine power (machine hours) Machine setups (number of setups) Total Manufacturing Overhead 63,360 170,000 22,000 192,000 825,000 16,500 13,500 30,000 $5,280,000 After completing his analysis, Hanton shows the results to Brian Epstein, the Sutcliffe division president. Epstein 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 very 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 have used number of setups and number of inspections as allocation bases. The numbers would be different had you used set-up 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." Hanton 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 the Maximum was introduced only recently, will not ask Sutcliffe to phase it out. He is also aware that a sizable portion of Epstein's bonus is based on division revenues. Phasing out either product would adversely affect his bonus. Still, he feels some pressure from Epstein to do something. Requirements: 1. Using activity-based costing, calculate the operating income per unit sold of the Maximum and Mammoth models 2. Explain briefly why these numbers differ from the from the operating income per unit sold of the Maximum and Mammoth models calculated using Sutcliffe's existing simple-costing system 3. Comment on Epstein's concerns about the accuracy and limitations of ABC 4. How might Suteliffe find the ABC information helpful in managing its business? 5. As an ethical accountant, what should Colin Hanton do in response to Epstein's comments