ABC, ABM (CMA) Applewood Electronics manufactures two large-screen television models, the Monarch, which has been produced for five years and sells for $900, and the Regal, a new model that sells for $1,140. Applewood’s CEO, Harry Hazelwood, suggested that the company should concentrate its marketing resources on the Regal model and begin to phase out the Monarch model.
Applewood currently uses a traditional costing system. The following cost information has been used as a basis for pricing decisions over the past year.
Per-Unit Data
Monarch
Regal
Direct materials
$208
$584
Direct labor hours
1.5
3.5
Machine hours
8.0
4.0
Units produced
22,000
4,000
Direct labor cost is $12 per hour, and the machine usage cost is $18 per hour. Manufacturing overhead costs were estimated at $4,800,000 and were allocated on the basis of machine hours.
Martin Alecks, the new company controller, suggested that an activity-based costing analysis first be run to get a better picture of the true manufacturing cost. The following data were collected:
Activity Center
Cost Driver
Traceable Costs
Soldering
Number of solder joints
$ 942,000
Shipments
Number of shipments
860,000
Quality control
Number of inspections
1,240,000
Purchase orders
Number of orders
950,400
Machining
Machine hours
57,600
Machine setups
Number of setups
750,000
Total traceable costs
$4,800,000
Number of Events
Activity
Monarch
Regal
Total
Soldering
1,185,000
385,000
1,570,000
Shipments
16,200
3,800
20,000
Quality control
56,200
21,300
77,500
Purchase orders
80,100
109,980
190,080
Machining
176,000
16,000
192,000
Machine setups
16,000
14,000
30,000
Selling, general, and administrative expenses per unit sold are $265.00 for Monarch and $244.50 for Regal.
REQUIRED:
A. Calculate the manufacturing cost per unit for Monarch and Regal under:1. A traditional costing system2. The ABC systemB. Explain the differences in manufacturing cost per unit calculated in part (A).C.Calculate the operating profit per unit for Monarch and Regal under:1. A traditional costing system2. The ABC systemD.Should Applewood concentrate its marketing efforts on Monarch or on Regal? Explain how the use of ABC affects your recommendation.