TikTokElectronics 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 2019was as follows: Traditional Costing TRIX Direct Materials $700 Direct Labour($20/hour) $120 Manufacturing overhead($38 per DLH) $228 Total per unit cost $1,048 In 2019, TikTokElectronics manufactured 26,000units 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 TikTokElectronics management accountant to prepare an 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 No. of orders $1,200,000 40,000 Machine setups No. of setups 900,000 18,000 Machining Machine hours 4,800,000 120,000 Quality Control No. of inspections 700,000 28,000 The cost driversused: 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-Xbased on ABC costings and recommend whether or not TRI-Xshould be discontinued.
TikTokElectronics 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 2019was as follows:
Traditional Costing TRIX
Direct Materials $700
Direct Labour($20/hour) $120
Manufacturing
Total per unit cost $1,048
In 2019, TikTokElectronics manufactured 26,000units 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 TikTokElectronics
Activity Cost Pools Cost Drivers Estimated Overhead Expected Use of Cost Drivers Purchasing No. of orders $1,200,000 40,000
Machine setups No. of setups 900,000 18,000
Machining Machine hours 4,800,000 120,000
Quality Control No. of inspections 700,000 28,000
The cost driversused:
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-Xbased on ABC costings and recommend whether or not TRI-Xshould be discontinued.
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