Reference no: EM13552568

Kinnard 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 2012 was as follows.

Traditional Costing	Elite	Preferred
Direct materials	$600	$320
Direct labor ($20 per hour)	100	80
Manufacturing overhead ($35 per DLH)	175	140
Total per unit cost	$875	$540

In 2012, Kinnard 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 Kinnard'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, 2012.

			Expected	Activity-
			Use of	Based
		Estimated	Cost	Overhead
Activity	Cost Driver	Overhead	Drivers	Rate
Purchasing	Number of orders	$ 775,000	25,000	$31
Machine setups	Number of setups	580,000	20,000	29
Machining	Machine hours	3,100,000	100,000	31
Quality control	Number of inspections	445,000	5,000	89

The cost drivers used for each product were:

Cost Driver	Elite	Preferred	Total
Purchase orders	11,250	13,750	25,000
Machine setups	11,000	9,000	20,000
Machine hours	40,000	60,000	100,000
Inspections	2,750	2,250	5,000

Instructions

(a) Assign the total 2012 manufacturing overhead costs to the two products using activitybased 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.