Jones, Inc., manufactures only two products, Medium (42-inch) and Large (63-inch) plasma screen TVs. To generate adequate
Question:
Information about the company's products this past year is as follows:
Medium (42-inch) Plasma TVs
Total direct material cost: $954,750
Total direct labor cost: $280,000
Production volume: 4,000 units
Large (63-inch) Plasma TVs:
Total direct material cost: $1,520,200
Total direct labor cost: $525,000
Production volume: 5,000 units
Currently, the company applies manufacturing overhead on the basis of direct labor hours. The company incurred $1,020,000 of manufacturing overhead this year, and 20,400 direct labor hours (7,005 direct labor hours making Medium TVs and 13,395 making Large TVs). The ABC team identifi ed three primary production activities that generate manufacturing overhead costs:
Materials Handling ($145,000); driven by number of material orders handled
Machine Processing ($750,000); driven by machine hours
Packaging ($125,000); driven by packaging hours
The company's only two products required the following activity levels during the year:
Material Orders Machine Packaging
Handled Hours Hours
Medium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225......................45,000..........10,000
Large . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275......................30,000..........15,000
Requirements
1. Use the company's current costing system to find the total cost of producing all Medium (42-inch) TVs and the total cost of producing all Large (63-inch) TVs. What was the average cost of making each unit of each model? Round your answers to the nearest cent.
2. Use ABC to find the total cost of producing all Medium (42-inch) TVs and the total cost of producing all Large (63-inch) TVs. What was the average cost of making each unit of each model? Round your answers to the nearest cent.
3. How much cost distortion was occurring between the company's two products? Calculate the cost distortion in total and on a per unit basis. Could the cost distortion explain the CEO's confusion about pricing competition? Explain.
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