Plum Electronics, a division of Berry Corporation, manufactures two large-screen television models: the Mammoth, which has been produced since 2010 and sells for $ 990, and the Maximum, a newer model introduced in early 2012 that sells for $ 1,254. Based on the following income statement for the year ended November 30, 2014, senior management at Berry have decided to concentrate Plum’s marketing resources on the Maximum model and to begin to phase out the Mammoth model because Maximum generates a much bigger operating income per unit.

Details for cost of goods sold for Mammoth and Maximum are as follows:

Plum’s controller, Steve Jacobs, is advocating the use of activity-based costing and activity-based management and has gathered the following information about the company’s manufacturing overhead costs for the year ended November 30, 2014.

After completing his analysis, Jacobs shows the results to Charles Clark, the Plum division president. Clark does not like what he sees. “ If you show headquarters this analysis, they are going to ask us to phase out the Maximum line, which we have just introduced. This whole costing stuff has been a major problem for us. First Mammoth was not profitable and now Maximum. “ Looking at the ABC analysis, I see two problems. First, we do many more activities than the ones you have listed. If you had included all activities, maybe your conclusions would be different. Second, you used number of setups and number of inspections as allocation bases. The numbers would be different had you used setup-hours and inspection-hours instead. I know that measurement problems precluded you from using these other cost-allocation bases, but I believe you ought to make some adjustments to our current numbers to compensate for these issues. I know you can do better. We can’t afford to phase out either product.” Jacobs knows that his numbers are fairly accurate. As a quick check, he calculates the profitability of Maximum and Mammoth using more and different allocation bases. The set of activities and activity rates he had used results in numbers that closely approximate those based on more detailed analyses. He is confident that headquarters, knowing that Maximum was introduced only recently, will not ask Plum to phase it out. He is also aware that a sizable portion of Clark’s bonus is based on division revenues.
Phasing out either product would adversely affect his bonus. Still, he feels some pressure from Clark to do something.

Required
1. Using activity-based costing, calculate the gross margin per unit of the Maximum and Mammoth models.
2. Explain briefly why these numbers differ from the gross margin per unit of the Maximum and Mammoth models calculated using Plum’s existing simple costing system.
3. Comment on Clark’s concerns about the accuracy and limitations of ABC.
4. How might Plum find the ABC information helpful in managing its business?
5. What should Steve Jacobs do in response to Clark’scomments?

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Plum Electronics Income Statement for the Fiscal Year Ended November 30, 2014 Mammoth Maximum Total Revenues Cost of goods sold Gross margin Selling and administrative expense Operating income Units produced and sold Operating income per unit sold $21,780,000 $5,016,000 $26,796,000 9,490,800 429,000 2,002,000 13,794000 3511,200 05,200 7,986,000 1,504,800 6,413000 1,075,800 7,488,800 S 1,573,000 22,000 $ 71.50 4,000 107.25 Marmmoth Maximum Total Per Unit Total Per Unit Direct materials Machine costs Manufacturing overhead costs$4840,000 $5,033,600 22880 2,569,600 $642.4 Direct manufacturing labor Total direct costs Total cost of goods sold 46.20 79.20 $ 8,954,000 400 1200 $767.80 435,600 3484,800 19.80 158.40 184,900 316 $ 440,000 $110.00 $13,794,000 627.00 $3,511,200 $87780 $220.00 Mammoth requires 1.5hours per unit and Maximum requires 35 hours per unit. The direct manufacturing labor cost is $13.20 per hour Machine costs include lease costs of the machine, repairs, and maintenance. Mammoth requires 8 machine-hours per unit and Maxirsum requires 4machine-hours per unit. The machine-hour rate is $19.80 per hour t Manufacturing overhead costs are allocated to products based on machine-hours at the rate of $2750 per hour. Units of the Cost-Allocation Base Activity Center (Cost-Allocation Base) Total Activity Costs Mammoth Maximum Total Soldering (number of solder points) 1,036,200 85000 385,000 1,570,000 Shipments (number of shipments) 800 20,000 Purchase orders (number of orders) Machine power (machine-hours) Machine setups (number of setups) Total manufacturing overhead 946,000 Quality control (number of inspections) 134,000 1,045,440 63,360 825,000 $5,280,000 16200 56200 2130 77,500 80,100 09,980 190,080 76,000 6,000 192,000 16,000 4,000 30,000