Reference no: EM132529059

The TV corporation produces high end flat screen tvs. They make 3 different models. Under the old cost accounting system, TV allocated overhead costs based on direct labor dollars. Recently, the firm adopted an Activity Based costing (ABC) system. The move to Activity Based Costing (ABC) was due to a price war in the market for 30 inch LCD in order to attract buyers for the World Cup. The market price for a comparable 30 inch tv was $400. The 30 inch LCD unit of TV could not figure out how their competitors were able to offer such low prices. The following data relates to one of their products.

30inch LCD

Annual Production 10,000 units

Direct materials $150 per unit

Direct labor $60 per unit

Firm wide manufacturing overhead cost pools

Cost Pool                  Cost                           Cost Driver

Material Ordering      $800,000            Number of purchase orders

Material inspection      $300,000           Number of receiving reports

Machine setup             $6,600,000         Number of setups

Quality control               $900,000            Number of output units (1 inspection for every 40 units)

Rent/fixed costs           $10,000,000          Direct labor costs

Total overhead               $18,600,000

Annual Activity

Cost Pool All Products 30 inch LCD

Material Ordering 400,000 purchase orders 80,000

Material inspection 2,000 receiving reports 500

Machine setup 6,000 setups 150

Quality Control 60,000 output units 20,000

Rent/fixed costs $4,000,000 Direct Labor cost $600,000

Question 1. Calculate the unit cost per 30 inch LCD under the old cost accounting system.

Question 2. Calculate the unit cost per 30 inch LCD under new Activity Based cost (ABC) system. Can TV offer the market price?

Question 3. Would the results change if we used the number of inspections as the cost driver for quality control instead of number of unit?