- X More info Based on the following income statement for the year ended November 30, 2020, senior management at Batton have decided to concentrate Patterson'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. Revenues Patterson Electronics Income Statement for the Fiscal Year Ended November 30, 2020 Mammoth Maximum Total $ 23,808,000 $ 15,000,000 7,614,000 $ 5,255,400 31,422,000 20,255,400 Cost of goods sold Gross margin 8,808,000 2,358,600 11,166,600 Selling and administrative expense 5,952,000 1,522,800 7,474,800 $ 2,856,000 $ 835,800 $ 3,691,800 Operating income Units produced and sold 24,000 Operating income per unit sold $ 119.00 $ 8,000 139.30 Previous question Requirements 1. Using activity-based costing, calculate the gross margin per unit of the Maximum and Mammoth models. 2. Explain briefly why these numbers differ from the gross margin per unit of the Maximum and Mammoth models calculated using Patterson's existing simple costing system. 3. Comment on Cooper's concerns about the accuracy and limitations of ABC. 4. How might Patterson find the ABC information helpful in managing its business? 5. What should Sonny Johnson do in response to Cooper's comments? Print Done X ed More info Cooper 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 isn't. "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." Johnson 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 Patterson to phase it out. He is also aware that a sizable portion of Cooper's bonus is based on division revenues. Phasing out either product would adversely affect his bonus. Still, he feels some pressure from Cooper to do Xsomething. Details for cost of goods sold for Mammoth and Maximum are as follows: Data table Mammoth Maximum Total Per Unit Total Per Unit Direct materials S 5,488,800 $ 228.70 $ 3,852,000 $ 642.00 Activity Center (Cost-Allocation Base) Total Activity Costs Mammoth Units of the Cost-Allocation Base Maximum Total Direct manufacturing labor (a) 468,000 19.50 273,000 45.50 3,763,200 156.80 470,400 78.40 Machine costs (b) 9,720,000 $ 405.00 $ 4,595,400 $ 765.90 Total direct costs 5,280,000 220.00 660,000 110.00 Manufacturing overhead costs (c) Soldering (number of solder points) Shipments (number of shipments) Quality control (number of inspections) Purchase orders (number of orders) $ 1,065,000 1,160,000 260,000 1,420,000 1,261,000 16,400 9,600 26,000 1,141,000 51,800 18,200 70,000 1,170,000 85,600 109,400 195,000 S 15,000,000 $ 625.00 $ 5,255,400 $ 875.90 Machine power (machine-hours) 57,000 175,700 14,300 190,000 Total cost of goods sold 1,246,000 (a) Mammoth requires 1.5 hours per unit and Maximum requires 3.5 hours per unit. The direct manufacturing labor Machine setups (number of setups) 15,800 19,200 35,000 cost is $13.00 per hour. $ 5,940,000 Total manufacturing overhead Print Done Print Done Print Done