TikTok Electronics manufactures an aluminium fibre tripod model “TRI-X” which sells for $1,600. The production cost computed per unit under traditional costing for each model in 2019 was as follows:Traditional CostingTRIXDirect Materials$700Direct Labour ($20/hour)$120Manufacturing overhead ($38 per DLH)$228Total per unit cost$1, 048In 2019, TikTok Electronics manufactured 26,000 units of TRI-X. Under traditional costing, the gross profit on TRI-X was $552 ($1,600-$1,048). Management is considering phasing out TRI-X as it has continuously failed to reach the gross profit target of $600. Before finalizing its decision, management asks TikTok Electronics management accountant to prepare an3analysis using activity-based costing (ABC). The management accountant accumulates the following information about overhead for the year ended December 31, 2019.Activity Cost PoolsCost DriversEstimated OverheadExpected Use of Cost DriversPurchasingNumber of orders$1,200,00040,000Machine setupsNumber of setups900,00018,000MachiningMachine hours4,800,000120,000Quality ControlNumber of inspections700,00028,000The cost drivers used:Cost DriversTRI-X ProductPurchase orders17,000Machine setups5,000Machine hours75,000Inspections11,000Required:1. Calculate the activity rates for each of the overhead items using the four cost drivers.2. Using the rates in (1) determine the unit cost for TRI-X. 3. Calculate the gross profit of each model of TRI-X based on ABC costings and recommend whether or not TRI-X should be discontinued.
TikTok Electronics manufactures an aluminium fibre tripod model “TRI-X” which sells for $1,600. The production cost computed per unit under traditional costing for each model in 2019 was as follows:
Traditional Costing
TRIX
Direct Materials
$700
Direct Labour ($20/hour)
$120
Manufacturing
$228
Total per unit cost
$1, 048
In 2019, TikTok Electronics manufactured 26,000 units of TRI-X. Under traditional costing, the gross profit on TRI-X was $552 ($1,600-$1,048). Management is considering phasing out TRI-X as it has continuously failed to reach the gross profit target of $600. Before finalizing its decision, management asks TikTok Electronics
3
analysis using activity-based costing (ABC). The management accountant accumulates the following information about overhead for the year ended December 31, 2019.
Activity Cost Pools
Cost Drivers
Estimated Overhead
Expected Use of Cost Drivers
Purchasing
Number of orders
$1,200,000
40,000
Machine setups
Number of setups
900,000
18,000
Machining
Machine hours
4,800,000
120,000
Quality Control
Number of inspections
700,000
28,000
The cost drivers used:
Cost Drivers
TRI-X Product
Purchase orders
17,000
Machine setups
5,000
Machine hours
75,000
Inspections
11,000
Required:
1. Calculate the activity rates for each of the overhead items using the four cost drivers.
2. Using the rates in (1) determine the unit cost for TRI-X.
3. Calculate the gross profit of each model of TRI-X based on ABC costings and recommend whether or not TRI-X should be discontinued.
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