Wilbury Electronics manufactures two home theater systems: the Elite which sells for $1,400, and a new model, the Preferred, which sells for $1,100. The production cost computed per unit under traditional costing for each model in 2011 was as follows.

In 2011, Wilbury manufactured 20,000 units of the Elite and 10,000 units of the Preferred.
The overhead rate of $35 per direct labor hour was determined by dividing total expected manufacturing overhead of $4,900,000 by the total direct labor hours (140,000) for the two models. Under traditional costing, the gross profit on the models was: Elite $525 ($1,400 €“ $875), and Preferred $560 ($1,100 €“ $540). Because of this difference, management is considering phasing out the Elite model and increasing the production of the preferred model.
Before finalizing its decision, management asks Wilbury's controller to prepare an analysis using activity-based costing (ABC). The controller accumulates the following information about overhead for the year ended December 31, 2011.

The cost drivers used for each product were:

Instructions
(a) Assign the total 2011 manufacturing overhead costs to the two products using activity-based costing (ABC).
(b) What was the cost per unit and gross profit of each model using ABC costing?
(c) Are management€™s future plans for the two models sound?Explain.

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Traditional Costing Direct materials Direct labor ($20 per hour) Manufacturing overhead (35 per DLH) Total per unit cost Elite $600 100 175 $875 Preferred $320 140 $540 80 Expected Activity Use of Cost Drivers Based Overhead Rate Activity Purchasing Machine setups Machining Quality conNumber of inspections Estimated Overhead $775,000 580,000 3,100,000 445,000 Cost Driver 25,000 20,000 100,000 Number of orders Number of setups Machine hours 29 31 89 5,000 Cost Driver Purchase orders Machine setups Elite 11,250 10,000 40,000 2,250 Preferred 13,750 10,000 60,000 2,750 Total 25,000 20,000 100,000 5,000 Machine hours Inspections