TikTok Electronics manufactures an aluminium fibre tripod model TRI-X which sells for $1,600. The production cost computed per unit under traditional costing for each model in 2019 was as follows:

Traditional Costing TRIX

Direct Materials $700

Direct Labour ($20/hour) $120

Manufacturing overhead ($38 per DLH) $228

Total per-unit cost $1, 048

In 2019, TikTok Electronics manufactured 26,000 units of TRI-X. Under traditional costing, the gross profit on TRI-X was $552 ($1,600-$1,048). Management is considering phasing out TRIX as it has continuously failed to reach the gross profit target of $600. Before finalizing its decision, management asks TikTok Electronics management accountant to prepare an analysis using activity-based costing (ABC). The management accountant accumulates the following information about overhead for the year ended December 31, 2019.

Activity Cost Pools Cost Drivers Estimated Overhead Expected Use of Cost Drivers

Purchasing Number of orders $1,200,000 40,000

Machine setups Number of setups 900,000 18,000

Machining Machine hours 4,800,000 120,000

Quality Control Number of inspections 700,000 28,000

The cost drivers used:

Cost Drivers TRI-X Product

Purchase orders 17,000

Machine setups 5,000

Machine hours 75,000

Inspections 11,000

Required:

1. Calculate the activity rates for each of the overhead items using the four cost drivers. (3 marks)

2. Using the rates in (1) determine the unit cost for TRI-X. (4 marks)

3. Calculate the gross profit of each model of TRI-X based on ABC costings and recommend whether or not TRI-X should be discontinued. (4 marks)

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